Do you know the value of your business?
It’s true that the real value of a business is only what someone is willing to pay for it. But that doesn’t mean you shouldn’t have some idea of how to value your company for today, and the future. Let’s walk through why you might want to know the value of your business, and the different methods that can be used to find its value.
Why know your business’s value?
It doesn’t matter whether you are looking to sell your business or not, knowing the value of the company you’ve built and grown is important for many reasons, like:
Estimating your future estate taxes
Obtaining business financing
Creating a succession plan
Analyzing your company’s inefficiencies
The 3 valuation techniques
While there is no one way to value your business, there are 3 different valuation techniques that can be used to help provide you an idea of what your business is worth.
Asset-based
Your assets, like inventory, machinery, and real estate are things you can point to that have value. This valuation technique is very straightforward and usually only accounts for assets and not future growth, which is why it is most often used for companies in bankruptcy or looking or looking to liquidate their assets altogether.
Earnings-based
Some believe that your business is only worth what it will earn in the future. This earnings-based valuation technique puts a multiple on your earnings to determine its value. This multiple varies drastically depending on your industry and business. When using the earnings-based methodology, you’ll also need to discount expenses and owner’s compensation.
Market-based
Many believe that in the end, the market is the only true indicator of something’s worth. Therefore, a market-based valuation would compare your business with other similar businesses to determine its ultimate value. Factors like growth rate, industry, and debt are all factored into this valuation.
| Valuation Technique | Can be useful for... |
|---|---|
| Asset based | Businesses in liquidation |
| Earnings based | Businesses generating strong and/or predictable cash flows |
| Market based | Businesses with comparable publicly traded companies |
Other valuation factors
While you can use one of the 3 valuation techniques to determine how much your business is worth, there are still other factors that come into play when putting together a final valuation number. These can include:
Company reputation - Is the business well-respected in the industry?
Customer loyalty - Does the company retain its customers easily?
Intangible assets - Can include goodwill, brand recognition, copyrights, and trademarks.
These other valuation factors can be coupled with a valuation technique to paint a clearer picture of your business’s valuation.
Get help to understand your business better
Knowing your business’s valuation today could be more helpful than you think. Your valuation can help inform your future plans, growth opportunities, and when the time comes, how much someone else might be willing to pay for your company when you decide to retire.
It’s important to remember that you don’t have to figure this out all on your own. Legal and tax professionals can help value your business and provide you insights on how you can increase its value and make it more attractive to potential buyers in the future.
Want to learn more and discuss your personal approach to valuing your business? Reach out to us directly with any questions or comments, or to schedule a one-on-one meeting. We’re here to guide you on your journey to financial security.
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