How to Value a Business- If you are searching for investors or you wish to sell your business, you are first required to determine its value. Abide by the guides given in this article to calculate it.
How can I estimate the economic worth of my business?
Even if your company has been in existence for over 20 years or is just beginning a fresh business, you might for one reason or the other prompted to place a cash value and the worth of your business at one point in time. It is needless to note that business valuation may seem very challenging and it is even a complicated task especially when you are not a financial expert or when you don’t have a good finance team.
In this article we will explore the reason behind you knowing the value of your business and the value of your shares, we will also give full insight into how you can perform a straightforward calculation using the business-valuation method.
Why do I Need to Know What my Business is Worth?
There are countless reasons why you are expected to know the value of your business, the reasons might include the following:
- When The business is currently up for sale.
- When You are probably seeking to find investors.
- You are making plans to sell a stock in your company.
- When A bank loan is needed for business growth.
- When You want to fully understand the details regarding your business’s growth.
Parameters to Valuing a Business
With regard to your type of business, there are some scientific metrics that may be used to value your public and private companies.
Public Business Valuation
For public establishments, valuation is defined as a market capitalization means where the worth of the establishment amounts to an equal figure with the total No. of all the available outstanding shares then multiplied by the set price for all the shares.
Private Company Valuation
Most times the Private establishment valuations are often more difficult to calculate and this might be because there’s a lack of concrete public detail, a moderate track record of performance, and sometimes their financial results may be either unavailable or they are not yet properly audited for accuracy. The 3 entrepreneurial stages of evaluation include;
- Ideation Stage
- Proof of Concept
- Proof of Business Model
How to Value Your Business ( Factors and Tips)
Company Size
The size of your Company is one of the crucial factors that is needed when you are valuing a company. And normally, the larger the size of your company/ business, the higher the rate of valuation. The reason is that smaller companies have less market power and they can be said to be more negatively affected by the loss of their main leaders. Additionally, larger businesses may also have a well-developed product and service so they are more accessible to getting capital.
Profitability level
Is your business earning a good profit? If so, this is a green sign, as businesses that have higher profit margins are likely to be valued higher than businesses with moderate margins or profit loss. The primary strategy needed in valuing the performance of your business based on profitability is first having a good understanding of the sales in your company and the estimated revenue data.
Market Traction and the Business Growth Rate
When you are calculating the worth of a company based on the standing market traction and the growth rate, it will be best to compare your business to the competitors. Investors are interested to know how big your industry market share is, and they want to know the amount out of the shares that you control, moreover they need to know how quickly you can make captures of a percentage of the business market. The faster you are able to reach the market, the harder it is to do your business valuation.
Competitive Advantage
What sector of your product, your services, or your solution makes you different from competitors? With this option, the manner you offer value to customers is expected to give you a higher ground and differentiate you from the competition. If this competitive advantage is too risky to maintain for a long time, and for this reason, it could negatively affect the valuation of that business.
A sustainable competitive advantage is going to assist your business in building and maintaining a better edge over your competitors, it guides you and puts you away from copycats in the future and it makes your price higher than your competitors for the fact that you have other unique things to offer.
The Growth Potential in the Future
Is the global market or an establishment expected to grow? Or are you making an opportunity to spread the industry’s product line in the nearest future? These kinds of factors will be able to boost the value of your business. When potential investors know the details about your business and when they are aware that it will grow in the future, the company value will become higher.
To Calculate the value of your business you can check this example;
Shares Outstanding multiplied by the Current Stock Price = Market Capitalization
For this equation, you are expected to know the business’s current stock price and then you check the number of all outstanding shares, we give you some sample numbers:
Shares Outstanding stands at $250,000
The current Stock Price stands at $11
This is what the solving formula would look like when you input the numbers (just for illustrations):
250,000 x 11
Based on the above calculations, the business’s market value will stand at 2,750,000.
Are They Business Valuation Calculators To Use When you want to value a business?
Yeas! Below are some of the business valuation calculators that you can make use of when you want to estimate the worth of your business.
- CalcXML
This calculator resembles your business’ current earnings and the earnings that are expected in the future to know a valuation. Extra business elements that can be considered by the calculator include the levels of risk that are to be involved (this may include business risk, financial risk, and industry risk) and it also checks how marketable the business is. - EquityNet
EquityNet’s valuation calculator for a business evaluates the different factors that must be put in place to create an estimate of the worth of your business or the business’s value. These factors are; Odds of the business’s survival, the Industry the business operates in, Assets and liabilities, Predicted future revenue, your Estimated profit or loss
- ExitAdviser
ExitAdviser’s calculator makes use of a method known as the discounted cash flow (DCF) option to check a business’s worth. To check for the valuation, “it will require that you offer the expected future cash flows and then you can ‘discount’ them back to the current day.”
Conclusion
There are thousands of reasons why you are searching to know the value of your business, the reasons might be that The business is currently up for sale, or When You are probably seeking to find investors, You are making plans to sell a stock in your company, When A bank loan is needed for the business growth or When You want to fully understand the details regarding your business’s growth. When you are calculating the value of a business based on the standing market traction and the growth rate, or any other factor, it will be best to compare your business to the competitors. Know that your potential Investors are interested to know how big your industry market share is, and they want to know the amount out of the shares that you control, take note!
Frequently Asked Questions
What is the easiest way to value a business?
Market capitalization is the easiest method of business valuation. It is estimated by multiplying the company’s share price by its total number of shares outstanding.
why do i need a loan for my business
there are countless reasons why you are expected to know the value of your business, If you are searching for investors or you wish to sell your business, you are first required to determine its value
Reference
- https://www.business.com/articles/four-simple-steps-to-valuing-your-small-business/
- https://blog.hubspot.com/sales/how-to-value-company
- https://online.hbs.edu/blog/post/how-to-value-a-company
- https://www.nerdwallet.com/article/small-business/how-to-value-a-small-business
- https://www.investopedia.com/terms/b/business-valuation.asp
Recommendations
