When you’re trying to value a business, there really isn’t a set formula for doing so, which means it’s entirely possible that you get it wrong. However, even if you do misfire a bit on the actual worth of a business, what really matters is how much it’s worth to you, and that simply can’t be defined by any system of metrics or finance.
Even when you do factor in your own personal attitude about a business, it’s still a good idea to use some of the tried-and-true methods for assigning a real value to it, so you don’t purchase something for a ridiculous price, and you don’t try to grossly over-sell a business you own. Here are some of the factors you should consider when trying to establish a relatively solid basis to value a business.
Tallying up all the assets associated with a business is one useful yardstick for valuation. When you take into account all inventory, equipment, real estate, and other assets, that should give you at least some inkling about what it might be worth. By looking at a company’s balance sheet, you should get a good overall picture of all assets owned, and if you can’t get that information from the balance sheet, you might want to think twice about the transparency of the business.
The quick assessment – revenue
This is another good way to value a business, since it is a strong indicator of how much money is coming in on a regular basis. In fact, this is a metric used by many financiers when valuing a business, because it’s at least very simple, if not altogether accurate. For instance, if a business generates $250,000 in sales over the course of a year, it is considered to be a $250,000 business. Obviously, that doesn’t tell the whole picture, but it’s a quick way of referring to valuation.
The deceptive nature of profits
Profits may be the most meaningful single attribute about a business, but they are certainly not the best indicator of its value. To prove the point, consider the fact that mega-giant Amazon has realized almost zero profit since it came into existence – but its value is astronomical, given the fact that it literally accumulates billions of dollars of sales every single year.
Discounted cash-flow analysis
This is a tricky and specific algorithm devised by financier Warren Buffet. His system for valuation starts off by calculating the cash figure generated annually by a business, then projects it out to the future, and assigns a monetary value to that future cash stream, based on the long-term interest rate of Treasury bills. While the theory behind it would require considerable explanation, something very similar can be found in an Excel spreadsheet, simply by using the ‘net present value’ (NPV) function.
Earnings and T-Bill rate calculation
One of the quickest and most commonly used valuation methods involves dividing the long-term T-Bill interest rate into the annual earnings of a business. Using this calculation, a business earning about $10,000 annually divided by a 3% interest rate, would mean that the value of the business is equal to about $333,333 worth of T-Bills, i.e. its valuation.
The best approach to valuing a business might be to consider several or even all of the above factors in assigning a dollar figure to a company. No single figure will tell the whole story of a business, and while using several metrics might be no more accurate, it does at least take into account more of the factors which characterize the business, so it should come closer to the truth.
If you are trying to value a business, let us help. BizResultz.com is about execution, getting things done, moving the needle, helping the business owner succeed. We want to meet with you and hear your story. It’s always exciting to learn about the solutions and challenges business owners are facing daily, and to see how we can work together.