Business valuation is a process an entrepreneur or a business will need to undertake. Determining the value of a business is required for several purposes some of which includes going public, selling the business, sourcing for potential investors among others. With that said, a business needs to ensure it gets the right value of it’s business.
It is generally believed that valuation comes through negotiation with a potential buyer or getting to know the value for other use. No matter what the situation is it is necessary that you work with facts in all you do. Its is however believed that business valuation is a subjective science most times it is intuitive
business valuation is a subjective science most times it is intuitive
It is generally seen as the value placed on it by the person you are doing business with. More reason it is important that you build goodwill as you build your company.At every point in time that you need to show your valuation the situations would never be the same. Banks might differ, potential investor & buyer e.t.c
This article is to put you in-between the line. there is no fast rules to what might happen by the time you actually intend to value your business but it can always guide you on the right steps you can take.
We only intended to give you the basic science, methodology and math behind the most common business valuation techniques, but keep in mind that there will always be outliers that fall outside of these frameworks.
There are strategic sales where a business is valued based on what it is worth in the acquirer’s hands at that point in time. There can also be goodwill valuation that buyer is willing to pay on the actual current value of the business.
Consider the methodology below to value your company.
A. Look at current marketplace value and your industry
Business valuation depends on the country you are doing business, the industry, the value of similar business, different valuation methods covers different industries.
B. Use the return on investment method to calculate value
The return on investment (ROI) method would work with your business profit to calculate the value.
ROI = (net annual profit/ selling price) x 100
For example, If the selling price of your business is $160 000, but want to test your ROI based on that price. You calculate that your net profit was $40 000 for the past year.
To work out the ROI, you use the formula:
ROI = (40 000/160 000) x 100
With this figure, your ROI is 25%.
If you have an ROI in mind, you can use it to calculate the price for your business before sale as it would help benchmark what you want:
Selling price = (net annual profit / ROI) x 100
For example, if you were looking for a ROI of at least 30% for the sale of your company, and your business’ net profit for the past year was $250 000, you can work out the minimum selling price you should set before any potential acquirer or investor.
Selling price = (250000/30) x 100
In this case, to achieve a ROI of at least 30%, you’ll need to sell your business for at least $833,333.
C. Asset Valuation Method:
Tangible and intangible assets are the most important thing to include when when determining your asset value. Tangible assets are what you can touch physically such as computers, plant and machinery, property and tools. Intangible assets are things that cannot be touched but are still valuable such as goodwill, Patents, intellectual property and brands.
When you can put this figures together you can have a clear indication of what your company is worth. depending on the resources available to you it is strongly advisable that you recruit an adviser to help you through this process.
Take depreciation into account
If you use your company assets to calculate value, remember to put depreciation into consideration, without that you might be unable to come up with the intrinsic value of your asset. Depreciation is the loss of value for your assets over time.
For example, you may have purchased a computer for your company three years ago for $2500. When calculating your business’ asset value, the value of the computer will no longer be $1000 as it was when you purchased it.
Talk to your accountant if you’re unsure about how to work out depreciation of your company assets.
D. Find out the cost of creating your business from scratch
The cost of creating your business from scratch can be used as a benchmark for valuing your company. This is the estimated cost to build a similar company in your industry from scratch within the current market. This part would involve you talking to industry experts to know how its done.
E. Estimate the future profit of your business
Estimating the Future Value of your business by using the NPV(Net present Value) method would help you provide a good idea of what the future value of what your company would be like and also the present value based on all your cash flow. Walk through this process with professionals.