Understanding how much a business is worth is determined by business valuation. There are calculators available online to input and output this information, as well as service-based companies to assist with these calculations. In the interim, figuring out how much a business is worth can also be calculated manually. A business valuation can be understood by looking at a few key areas with relatively accurate figures. There are several methods and formulas for looking at how much a business is worth, a few of which will be explored here.
Get Help from a Business Finance Professional
Exploring the field of business valuation might lead to simply hiring a professional to help determine the worth of a business. A business broker, for example, typically has experience with negotiating many valuation transactions from a wide range of companies. As a professional, a broker will already have proven methods and formulas in place for looking at the worth of a business. Their connections alone to other financial pros in the industry tend to save a company time and money. Saving money, or perhaps even making money for the target business, is a positive that may outweigh utilizing other manual methods.
Assets Minus Total Liabilities
One good old, tried-and-true method for figuring out what a business is worth is by subtracting total liabilities from total assets. This is also called the “book value” of the business because it requires looking at the black-and-white financial records of the business. One con of looking at the books alone for valuation purposes is that future projections are not considered. Even so, this is a more conservative method for determining the worth of a business. Sticking with what is actually on paper is one way to continue on its current trajectory as opposed to planning to significantly grow or scale.
Looking at the Market of the Business
Oftentimes, business owners or financial pros look at the recent sale of similar businesses in the market to determine what a business is worth. This is considered the “market method” or market approach to business valuation. Business journals, internet resources, and other data from similar companies can be found to compare one business to another or multiple businesses in a market. Each individual or company typically uses their own multiplier to calculate where the appraised value ends up for the business at hand. This multiplier can take into account factors such as the length of time in business, profits, risk, customers, and more.
There is no exact, right or wrong way to figure out what a business is worth. Even so, accuracy in calculating the financial records and past performance of the business are important factors. Business valuation tactics can become somewhat of a science with methods ranging from basic to complex. Consulting a professional with a track record of success can eliminate a great deal of guesswork in determining what a business is worth. As with many aspects of business, it comes down to the decision to put in the time and resources to compute the information about the business or to employ the expertise of a professional in the field.
