How to Determine Your Business’s Value
One of your primary goals when you start a business is to grow. The value of your business, then, tells you just how far you’ve gone in accomplishing that goal.
But a business valuation is far more than just a measuring stick.
This number forms the basis for several financial maneuvers and decisions. Whether you’re raising capital, awarding or gifting stock or even selling your business, you’ll probably need to get a business valuation – and thus it’s important to understand how they work, and how to put a price on your company.
Here, we’ll discuss some of the basics of determining your business’s value.
Ways to Value Your Business
While there are several ways to value a business, three stand out among the most prominent:
- Asset-Based Valuation: To do an asset-based valuation, merely take a company’s assets and subtract its total liabilities. Of course, it’s not as simple as it sounds – for instance, how exactly one values certain intangible assets, such as patents and trademarks, can vary widely. Still, numerous industry standards recommend using this method when determining business valuation.
- Income-Based Valuation: Income-based valuations set to determine a company’s worth based on future profits. Discounted cash flow (DCF) is a common income-based valuation meant to determine what an investor could expect from an investment over time. The theory is based on the idea that cash now is worth more than cash in the future, so DCF “discounts” future cash flows. Another income-based valuation is capitalization of earnings, which is similar to DCF, but is a simpler calculation that assumes consistent growth over time.
- Market-Based Valuation: With market-based valuation, a company or asset is compared to another similar company or asset that was recently on the market or sold. This type of business valuation is frequently used with publicly traded companies.
Why Business Valuations Are Important
A business owner may need to determine the worth of their company for a number of reasons throughout their career. Among other things, business valuations are vital when:
- Applying for financing, such as SBA loans or angel investments
- Reporting your company’s financials
- Determining taxes such as estate, gift and capital gains
- Restructuring or recapitalizing
- Buying out managers
- Selling the company
Notice something that all of these bullet points have in common? They’re all important, sometimes even transformative, moments in a business’s life cycle. And they all have to do with money flowing in and out of the company.
That means you can’t take business valuations lightly.
You could try to value your company by yourself. But this is not an easy task – it’s one that takes considerable financial and accounting acumen. So when you need a business valuation, lean on the expertise of professionals. McManamon & Co. can provide independent, unbiased business and professional practice valuations for closely held companies, professional practices, partnerships, LLCs and other business interests. Learn more by calling us at 440.892.8900 or contacting us online today.
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