How to Determine Your Business’s Market Value

Businesses built from scratch hold a special place in the hearts of their founders. They are emotionally, financially and mentally attached to the venture. So, when entrepreneurs think about their exit, they are bogged down by the charge of evaluating the company.

It is a challenging task for the owner because they are unable to look at the individual costs objectively. Their personal bias makes them digress from the actual figures. Thus, they must follow the tested formulae when they sell business online to ensure that they get the right price.

It is essential because overpricing can turn away buyers, and under-pricing can lead to losses. Thus, here is how you can determine the market value of your business.

What is the Market Value of a Business?

Business valuation is the process of calculating the worth of the business that has been put up for sale. The calculation is best done by business brokers and accountants who are working in the industry. They use a variety of factors to determine its value, such as the current value of the assets after depreciation, projected revenue and past performance.

Entrepreneurs who are planning to exit need to use the different methods of business valuation to understand the market price of the entity. After they determine the value, they need to add a few thousand dollars extra to make room for negotiations.

Using intuition or the cost price of the assets to calculate the business value is not the right way of finding its worth. The methods utilised by professionals get the right price for the seller that helps them to secure enough funds for their retirement.

Methods of Determining Your Business’s Market Value

There are several methods that are leveraged by entrepreneurs and accountants to get the right price. You must use a combination of these methods to arrive at the asking price that will bring the desired return on investment by selling a business. Let us look at a few of these techniques.

1. Asset Method

Although this is not an accurate measure of the business’s value, you need to have this number in mind to make a start. The asset method involves adding all the assets of the business and then deducting all the debts and liabilities from the sum.

For example, if the sum of the assets and equipment of the business is $1,00,000 and the sum of its liabilities is $40,000, the value of the business will be $60,000. A profitable business’s worth should not be calculated using this method.

2. Comparable Analysis

Also known as the market approach, the comparable analysis method works by comparing the prices of similar businesses in the same sector. Comparable businesses should have the same size, turnover, and market share. Also, they must have been sold recently to understand the market trend.

This approach compares the earnings of the businesses without including taxes, interest, depreciation and amortisation. The success of this method depends on the amount of research done by the accountant and the data collected for the comparison. It can provide an approximate estimate if done correctly and helps to sell the business at the best price.

3. Discounted Cash Flow Analysis

It uses a complex method that can be used by accountants correctly to deduce the value of the business. The analysis is based on identifying the annual cash flow and then using the amount to project the cash flow in the future. Thus, the value of the business is calculated based on the income it is expected to generate in the future.

4. Earnings Multiple Method

Some accountants also use the earning multiple method or the price to earnings ratio (P/E). It involves using the listed stock’s market price and its past earnings to find out the earnings multiple. The multiplier is determined by the accountant after understanding the economic factors, industry conditions and other business-specific factors.

It is also called the time revenue approach because it involves allocating a multiplier to the present revenue of the company. However, this method can be used only for listed businesses. Thus, often small business owners are unable to use it.

5. Capitalisation of Earnings Valuation

It seems like the discounted cash flow analysis but is a bit different. It calculates the future profitability of the business, which is based on its cash flow data, yearly return on investment and estimated value.

It finds out the value of the business based on its profitability in the future. The method assumes that the business will remain stable in the coming years and have the same cash flow and ROI.

6. Book Valuation Method

It is the simplest way of evaluation because it determines the value of the business by looking at the balance sheet. It takes the current bottom line of the business into account and does not check the past or future performances. It is usually used if the business has not been performing well, but its assets are valuable.

Conclusion

When entrepreneurs plan to sell business online, they must know the actual worth of their business to set a realistic asking price. Thus, they must use the methods used by professionals to get the right figure.