A business valuation is the process of estimating the monetary worth of an enterprise. It’s crucial to report on financials, dividing shares in the event of selling all or a portion of your business, creating succession plans and obtaining finance.
The value of a company can be determined by its assets, earnings, or market potential. The most commonly used methods for valuing a company include the earnings-multiples or times-revenue method and the discounted cash flow (DCF) method.
The times-revenue-or-earnings-multiples method multiplies your company’s revenue or earnings by an industry standard to come up with a figure. This is a reliable method to estimate the value of your business, but it’s not always the complete picture. A restaurant that earns $250k a year, and is valued at five times that amount, could be worth more if it’s run by an established brand name or a excellent dining experience.
The formula for book value is a different method used. This method is based on adding the total value of your assets, such as equipment, real estate and inventory and subtracts liabilities, which are outstanding loans and debts. This method is quick and simple, however it might not reflect the true worth of your company, especially when you’re looking at the possibility of growth. Buyers and investors are likely to be more interested in your potential future earnings than the assets you currently have. This is why it’s a good idea to run a full appraisal, such as by an appraiser for business or a broker, before seeking outside investment.