A business valuation is a process which estimates the monetary value of an organization. It is essential to make financial reports, dividing shares, selling all or part of your business, establishing succession plans and obtaining funds.
The value of a business can be determined by assets either in terms of earnings or market value. The most common methods of measuring the value of a company are the earnings-multiples method or times-revenue and the discounted cash flow (DCF) method.
The earnings-multiples method or times-revenue is a method of taking your business's revenue and earnings and multiply it by a industry standard multiple to determine an estimate. This is a great way to get a sense of what your company's worth, but it's not always able to provide a complete picture. A cafe that is earning $250k a year, and is valued at five times that amount, could be worth more if it's got an established brand or high quality dining experience.
The formula for book value is another popular method. This method adds up your total business assets, such as equipment inventory, real estate, and inventory and subtracts liabilities which include outstanding loans and debts. This method is simple and easy, but it may not accurately reflect the true value of your business, especially in the case of how to evaluate a business worth growth potential. Investors and buyers are likely to be more concerned about your future profits than in the assets currently. It is essential to have an appraisal that is complete by a professional appraiser or broker prior to deciding to seek outside investment.