5 Tips for Calculating How Much Your Business Is Worth
If you want to sell your business or have received an offer, it’s important to know its actual market value. This will help you determine how much you should really sell your business for, how much it’s worth, and whether it will be profitable in the long term. These five tips will help you assess your business’s market value and determine how much it’s truly worth.
Have Your Business Professionally Appraised
A professional business appraisal employs an unbiased third-party appraiser to calculate a business’s value. They consider factors like assets, outstanding debts, accounts receivable, cash flow, and market conditions.
A professional appraisal can help prepare your business for acquisition, a merger, sale, insurance coverage, and more.
Calculate Net Asset Value
Net asset value subtracts a company’s liabilities from its assets. While this figure is typically used to calculate the value of an investment fund, it can be equally helpful in considering the overall value of a business and its true monetary worth on the market.
For investors, NAV can be a helpful way to calculate the value of a single share. It can also be used to track financial performance over time since a company’s assets and liabilities can change daily.
Determine Its Price-to-Earnings Ratio
Another helpful figure for businesses assessing their worth is the price-to-earnings ratio (P/E ratio). Using this metric, businesses can determine their share price against their earnings per share. It’s a helpful way to determine the value of a company’s stock for investors.
In order to get the most accurate reading, a company should calculate the P/E ratio of its top competitors to determine where it lies in the market.
Compare Debts to Profits
A relatively straightforward way to determine a business’s worth is to subtract its debts from its annual revenue. How much does it spend per year in liabilities, and how much does it net in profit from its income?
Revenue and profits aren’t the same. Revenue refers to how much a company makes from sales in a given period. Profit is how much of that money the business keeps after paying its expenses.
To determine if a company is performing well financially, it’s important to consider not just how much it sells per year but what percentage of those sales it actually keeps.
Perform a Discounted Cash Flow Analysis
A discounted cash flow analysis tells you the present value of future cash flows. This uses a projected discount rate to project future cash flows. While it can be a helpful financial projection, it shouldn’t be done in isolation. It also relies on estimates, so it’s not a definitive way to determine a business’s value. However, it can play a role in analyzing overall profitability and financial health.
The best way to calculate how much a business is worth is to use a combination of financial assessments and consider a professional appraisal. By working with a professional, businesses can gain a deeper understanding of their financial health. It can also help potential buyers or investors determine whether an organization is really worth their money.
