How To Valuate Your Business & Estimate Its Future Profitability
Whether you are planning to sell your business, you need to divide assets due to partnership dissolution, or you simply want a measure of how fast your enterprise is growing, it can be extremely useful to valuate your business periodically. However, this is not a precise science, and if this is the first time you’ve attempted to figure out your business’ financial worth, you may be feeling a little overwhelmed.
There are many factors to take into consideration, and with an ever-shifting market, it can be tough to make an accurate estimate. Even so, here are a few tips on calculating the value of your business, and what this means for its future.
Who Decides What A Business Is Worth?
The problem is, the true value of a business can only ever be what someone is actually willing to pay for it. As such, while there are many aspects you can measure, it is also important to keep the current market in mind. At the same time, if you decide to sell up, it’s your choice whether or not to accept a specific offer. In that sense, you also have some control over the perceived value of your business, as you can set your own price.
Ultimately, you need to find a balance between what you are willing to accept and what a potential buyer is willing to offer. You may even be surprised; it’s possible that a buyer may see the hidden potential in your business, or have ideas for its development that you have not considered. As such, valuation can also give you an insight into how to build upon your existing framework, and evolve your business into something even more successful.
What Can You Measure?
The value of your business is a combination of all its assets, revenue streams, and costs. A buyer will want to know not only how well your business is performing right now, but what its prospects are, and how successful it has been in the past. You should make a note of each of the following items, as they can all contribute to the final figure.
● Business accounts. A buyer will want to have an idea of past profits, as well as being able to see whether your accounts are all in order, and easy to refer back to. Messy accounts can be a deterrent for many buyers as they make it harder to learn from prior data.
● Prospects and revenue streams. This can include any ongoing or prospective contracts, your customer list, and any other sources of income.
● Assets. Everything from your stock to business equipment and commercial property counts here, depending on the valuation method you choose to go with.
● Costs. If you have any ongoing leases, running costs, or other regular expenses, these will also impact the value of your business. While every company will have costs, buyers need to see whether these costs are offset by the business’ income or potential.
● Branding. All of your marketing efforts, publicity, and brand development really pay off when it comes to selling your business. This is because the more visible and well-known your brand is, the easier it will be for a buyer to continue promoting and expanding the business.
● Staff. Your staff team is another essential factor, as they are responsible for the smooth running of your business. If you have a highly skilled team, able to work independently and proactively, this can greatly facilitate the transfer of your business to new ownership. However, if your team is heavily reliant on your guidance and leadership, it can be a lot harder for a potential buyer to fill your shoes.
These are some of the main points to consider, but every aspect of your business has a part to play. Even if you are not planning to sell, it can be helpful to discuss these matters with a theoretical buyer, simply so you can build a better picture of what they might want to know about your business, and what you can work on to increase its overall value.
There are several different methods you can use to calculate the value of your business, and the steps you use to some extent depend on what you plan to sell, if anything. Remember, you might decide to sell shares in your business, rather than selling the trade itself.
● Adjusted net profit vs. normalized profit. Your salary needs to be taken into account when determining the profitability of your business. For example, if your profit is artificially inflated by your decision to take a smaller than average wage, this could mean the value is lower than it originally appears. The same applies when it comes to annual profits; buyers are likely to prefer a figure that reflects the average profits for a year, rather than a figure taken from an unusually successful period.
● Discounted cash flow. You can use your existing business data to make predictions about the future profitability of your organization. However, it is important to take factors such as inflation into account when using this method. In general, a rate of between fifteen and twenty-five percent is deducted in order to account for inflation’s impact on projected earnings.
● Asset valuation. This aspect of valuation calculates the total sum of your assets, minus any costs or liabilities. However, when determining this figure, you will need to take into account the rate of depreciation that could affect the overall value of individual assets.
● EBIT & EBITDA. This is similar to calculating the adjusted net profit of your business. EBITDA, or earnings before interest, tax, depreciation, and amortization, is a means of acquiring an unmodified estimate of your business income. This can be looked at in conjunction with your EBIT, and net earnings to get a clearer picture not only of your business ROI, but of the impact factors such as tax and depreciation have on your profitability.
Even if you’re not planning to sell, learning the value of your business can help you to make important decisions about its future. As you work through each aspect to determine how it impacts the overall worth of your enterprise, you will quickly identify strengths upon which you can build, and weaknesses which you can work to remedy.
Everything from the location to the infrastructure of your business plays a part, and it can be hard to form an accurate estimate without considering each of these points individually. Nowadays, even online businesses and e-commerce stores can fetch a very generous price, if you have good traffic and a strong brand. Browsing marketplaces like Exchange will give you a good idea of how much businesses like yours are going for.
Once you begin to develop a sense of the overall worth of your business, you will quickly learn to identify where improvements can be made.
This also gives you greater influence in negotiations and other business transactions, as you will be able to demonstrate a clear understanding of your business’ worth. This, in turn, can be a powerful tool for inspiring confidence in potential partners, influencing investors, and building the reputation of your brand.
Related reading: When Are You Ready to Franchise Your Business?
Victoria Greene is a digital consultant and freelance writer. On her blog, she shares tips on various digital strategies, including affiliate marketing. Love to learn from the experts — the only way to make it to the top fast!