How To Calculate The Value Of Your Business: Here’s What Investors Are Looking For

Any business as an individual organism is unique by nature and it is almost impossible to value your company by simply looking at offers on the business sale market.

In practice, given the limited number of investors, the amount requested by the business owner and the amount he ultimately receives in some cases varies significantly, if you don’t want to figure it out websiteclosers can help you with this.

We will talk about business valuation methods in this article.

What Is The Best Method Of A Business Valuation?

To understand  how to estimate business worth, you should familiarize yourself with three main methods:

1. Profitable

It is based on the income of the enterprise. It depends on them how much the object will cost in the end: the more money the company brings, the higher its price.

The expert estimates how much the income is now, which in the future the owner will be able to receive in case of successful operation of the company or sale, as well as the economic risks associated with this process.

2. Expenditure

The company is considered from the position of incurred expenses. The basis is the fact that the book value of assets does not correspond to the market value. This causes the need to adjust the balance sheet.

This method of how is a business valued is used in cases when the business does not generate stable income. For example, the company has recently been established or is in the process of liquidation.

Experts determine the market value of each asset separately, and then subtract the number of the company’s liabilities from the number of assets. This is how equity capital is obtained. This approach allows us to calculate the most efficient method of land use and to evaluate construction in progress.

3. Comparative

The appraiser bases the calculations on information about companies similar to the one to be evaluated. How accurately the value will be established depends on the reliability of information about competitors.

The value of the enterprise is oriented to the amount that can be sold to a similar company that is already above the market. The approach is rarely used, as it is difficult to find two identical companies on the market.

It is difficult to say that there is the best method because each company is individual, so choosing a method how to put a value on your business based on your data is better.

Acquaintance With EBITDA Indicator

EBITDA – Earnings before interest, taxes, depreciation, and amortization – is an economic indicator corresponding to profit before interest, taxes, depreciation, and amortization. This is exactly the easiest and best way to value a business.

In simple words, EBITDA shows how much money a company can generate before taxes, interest, depreciation, and amortization. The last two factors are particularly large and significantly reduce net profit in capital-intensive industries (e.g. oil and gas).

It is generally accepted that EBITDA fairly accurately reflects the cash profit from the main activity of the company.

Business Valuation For Dummies: Formula

The valuation with EBITDA (remember, this is not an accounting indicator!) is as follows:

Net income + Income tax expense – Income tax refund (+ Extraordinary expenses) (- Extraordinary income) + Interest paid – Interest received = EBIT + Depreciation and amortization of tangible and intangible assets – Revaluation of assets = EBITDA

How To Value A Business For Investment: What Affects The Price?

During the evaluation the appraiser takes into account various micro and macroeconomic factors, which include the following:

1. Demand

Demand is determined by consumer preferences, which depend on what income the business brings to the owner, when, with what risks it is associated with, and the possibilities of control and resale of the selling business websiteclosers.

2. Income

The income that the owner of the object can receive depends on the nature of the operating activity and the possibility of making a profit from the sale of the object after use. Profit from operating activities, in turn, is determined by the ratio of income and expense flows.

3. Time

The time of income generation is of great importance for the formation of the enterprise value. It is one thing if the owner acquires assets and quickly begins to make a profit from their use, and another thing if investment and return on capital are separated by a significant period.

4. Risk

The value of the value is inevitably affected by the risk as the possibility of obtaining expected future income.

5. Control

One of the most important factors when valuing your company is the degree of control that the new owner receives.

If the company is bought into individual private ownership or if a controlling stake is bought, the new owner receives such significant rights as the right to appoint managers, determine the amount of their remuneration, influence the strategy and tactics of the company, sell or buy its assets, restructure and even liquidate the company, decide on the acquisition of other companies, determine the number of dividends, etc. Because large rights are acquired, the value and price will usually be higher than in the case of buying.

6. Constraints

The value of the enterprise reacts to any restrictions that the business has. For example, if the state restricts the prices of the enterprise’s products, the value of such companies will be lower than in the absence of restrictions.

7. The Ratio Of Supply And Demand

Demand for an enterprise, along with its usefulness, also depends on the solvency of potential investors, the value of money, and the ability to attract additional capital in the financial market.

The investor’s attitude to the level of profitability and the degree of risk depends even on age. Younger people tend to take more risks for the sake of higher profitability in the future.

For the work of the management apparatus to increase the value of the business, it is necessary to perform the following actions:

  • Analyze investments and increase revenues;
  • Reduce the cost of using the accumulated capital;
  • Track the return on investment, it should be higher than the cost of the acquired capital;
  • Generate cash flow and accelerate the development of the company.

Use this simple business valuation advice to sell your business and get the maximum benefit from it. 

Share this post:

Related Content