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Do you know how much your business is worth?

Do you know how much your business is worth?

February 20, 2024

As a business owner, you know a lot about your company. But do you know how much it’s worth? The value of your business can be a helpful indicator of where you’re at in the market, and what you can change to help boost its value to potential buyers today, or in the future. Let’s take a look at what factors play a role in valuing your business and how you can set an accurate valuation on your company.

Valuation models

There is no one way to value your business because so many factors are at play when attempting to put a price tag on your company. However, there are three valuation models that can serve as starting places for valuing any company. These models are:

 

  • Asset Based - Values your company based on its assets
  • Earnings Based - Values your company based on its earnings today, and in the future
  • Market Based - Values your company based on comparable companies in the market

 

Each of these valuation models has its benefits and drawbacks and is best used in certain instances. Keep in mind, while these models are helpful, they aren’t the only thing to consider for your valuation.

 

 

Asset Based

Earnings Based

Market Based

Valuation factor

Tangible and intangible assets

A multiple of earnings

Other businesses

Potential problem

Doesn’t account for future earning potential

Multiple to use is subjective and can vary based on many factors

Valuation info is difficult to find for private companies

Best for…

Companies in bankruptcy or liquidation

Healthy businesses

Companies with publicly-traded comparables

Economic factors

Alongside your valuation model, you will need to consider macroeconomic factors and how they may play a role in the value of your business. Economic indicators like interest rates, unemployment, consumer spending, and inflation can all have impacts on your company’s valuation.

 

For example, if interest rates are high, it could be harder for potential buyers to obtain financing for purchasing your company. This could mean your business’s value lowers. The opposite goes for a low interest rate environment. In this instance, if you’re using an earnings based valuation model, you may need to change the multiple you use in your calculation.

Subjective information

Some information, like your business’s income and expenses, are clear and objective. But other valuation factors are more subjective, and can be difficult to value. Still, you need to consider subjective information when attempting to put a valuation on your company. Subjective info can include:

 

  • Management team
  • Brand reputation
  • Growth potential
  • Operational risks

 

For instance, a local business with decades in a small community and a very loyal customer base could be seen as more valuable than a similar business that hasn’t been in operation very long and has a larger customer turnover.

A business is worth what someone will pay

If you are valuing your business for a potential sale, it’s important to remember that your business is only worth what someone is willing to pay for it. As previously mentioned, macroeconomic or industry factors could cause potential buyers to pay more or less for your business in a potential sale. Also, a competitive market with multiple potential buyers may allow you to get more money for your business.

 

 

Learn more about how we can support you and your business or reach out to us directly to schedule a meeting or ask a question.