How to value a business
If you’re considering buying or selling a business, understanding how to value a business is crucial.
Business valuation is the process of determining the economic value of a company, which can be helpful for negotiations, financing, and taxation purposes.
In this beginner’s guide, we’ll go over the main factors that affect business value and the most common valuation methods.
1. Financial Performance
The financial performance of a business is one of the most important factors in determining its value. Buyers will typically look at the company’s revenue, profit margins, cash flow, and growth potential. They will also consider any outstanding debts or liabilities, as well as the company’s historical financial performance.
But ultimately it comes down to an EBITDA multiple of X. Depending on your business, this number be at the lower or higher end of market multiples. It takes into account the barrier to entry, quality of the clients, staff retention, historical growth and opportunities, management structure, client concentration and many more. Have a look at our article on what buyers are looking at.
2. Industry and Market Trends
3. Assets and Liabilities
4. Valuation Methods
There are several methods used to value a business, including the following:
Market Approach: This method compares the business to similar companies that have recently been sold. Check out the market for recent transactions, ask your accountant or lawyer friends, or engage with a broker.
Income Approach: This method uses the company’s financial data to project future earnings. You may see something like a DCF (Discounted Cash Flow) — a method used to estimate the current value of future cash flows by accounting for the time value of money.
Asset-Based Approach: This method looks at the value of the company’s assets and subtracts any outstanding debts or liabilities. There’s a general rule that you don’t sell under Net Asset Value.
It’s important to note that no single method is perfect, and a combination of methods may be used to get a more accurate valuation.
When selling a business, there are several mistakes that can be made that can affect the valuation and the selling price. To learn more about these mistakes and how to avoid them, check out our article on “Tips For Selling Your Business: Common Mistakes To Avoid“
If you don’t believe us, check out Harvard Business School’s article on how to value a company.