Calculating Business Value: 8 Tips for More Accurate Results

calculating business value

As you work to determine your business’ market value before selling it, you’ll find that most experts will advise you to make sure you get the most accurate results. The following recommendations will help you do so in the most efficient way, providing your possible buyers with the best evidence on why they should spend more to buy your business.

  1. Look at the Value of Your Assets

You might own a lot of high quality equipment, or you might have invested in a lot of quality products that have to be sold. In each case, the assets you possess will drive the value of your business higher, so it’s very important to get your logistics in order and establish the true value of all your assets. Don’t forget to subtract any debt you might have and consider the depreciation and appreciation of your items before continuing.

  1. Annual Revenue

This should be obvious, but the more your business is likely to earn per year, the more valuable it will be to your buyers. The problem arises when you’re in a niche that is somewhat volatile so that you’ll have to put in more effort to establish the future earning potential of your business venture.

  1. What Really Goes Into Your Business

How much have you been spending on your business to continue promoting and expanding it? Past investments and accounting data set against the extra revenue your business may have earned as a result of those investments will give you a fair assessment.

  1. Manpower

The business you want to sell may have staff members and experienced managers who have grown with the company and would like to keep their positions. Their invaluable expertise goes beyond the value that new employees could bring to the table, even if they might have more experience and better training.

  1. Price to Earning Ratio

A great way to determine how profitable your business is likely to become over time is the price to earning ratio. This is a means to use earnings multiples to determine how much your business might be worth based on how much it earns on an annual basis. For instance, a typical P/E ratio of 5 will mean that your business is worth 5 times the amount it currently earns.

  1. Cashflow Analysis

Using a complex, “net present value” formula, the discounted cash flow analysis method projects the annual cash flow of your business into the future to predict its profitability. It then discounts that future value to today. You can use an online NPV calculator to get all the right numbers.

  1. Current Trends

Trends change, and they also set the stage on how a company might perform in the long run. When calculating business value, consider recent changes and predictions for future trends when assessing the true market value of your business.

  1. Go Beyond Financial Benefits

It’s important to consider not just the financial benefits of your business but the social impact, as well as the environmental, political and psychological impact it might have on the local community. These might be just a few aspects that need to be regarded, as for example, the fact that your products might offer comfort or healing to medical patients or disabled individuals goes far beyond the financial benefits that those products will bring to your company.