As a business owner, you understand the hard work and sacrifice you’ve poured into your company. However, those sacrifices are more easily understood by the general public (and by would-be investors or purchasers) when translated into certain, quantifiable terms.
Determining your company’s value involves more than examining your profits and losses. Considerations for Texas business valuation include a company’s financial performance, current market conditions, how competitive the landscape for your business is, your company’s potential for growth, and other factors.
Even if you have no current plans to sell your business or offer investor shares, it’s important to know your company’s true value.
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What is Company Valuation?
Company valuation refers to the methods used to determine the actual value of your business.
There are many factors (like the ones mentioned above) that can help investors, accountants, and business owners determine the value of a particular business.
Here are six ways to calculate company valuation:
1. Book Value
The most straightforward method of determining a company’s value is to simply subtract liabilities from assets. This methodology is called determining book value.
Although it is effective, it doesn’t take into consideration potential revenue or future earnings. For investors, that is extremely valuable and important.
2. Market Capitalization
A company’s market capitalization represents the total value of its outstanding shares of stock. You can arrive at market capitalization by multiplying the current market value of one share by the amount of outstanding shares a company has. (Outstanding shares means shares owned by shareholders or other investors.)
3. Cash Value Analysis
The cash value analysis method of business valuation (also referred to as discounted cash flow). This method of business valuation allows a company to predict its potential for liquid assets in the future.
In other words, it assigns a value to the company’s current cash flow in tomorrow’s economic conditions. To find a company’s discounted cash flow, you will need to arrive at a terminal cash flow prediction, which makes this type of business valuation useful but slightly unreliable.
4. Enterprise Value
Enterprise value is often thought of as a more accurate picture of a company’s valuation when compared to market capitalization. To arrive at enterprise value, a company combines its debt and equity and subtracts the cash flow that is not being used to support the business. Enterprise value takes into consideration a company’s book value, while market capitalization relies on value determined by investors.
5. EBITDA
It would seem easy to assign a value to your business based solely on your profitability. However, most financial analysts and investors don’t want to rely on this because it can be manipulated to make a company look better or worse.
For instance, tax liabilities and payments to investors can make a company appear less profitable during certain periods even if the company’s profit margins don’t change. To consider amortization and depreciation, companies may elect to arrive at a valuation called EBITDA.
This means “earnings before interest, taxes, depreciation, and amortization.” You’ll need an accountant or business analyst to help you arrive at this number because each company’s formula will differ.
6. Revenue Multiple
A popular way to very quickly determine a company’s potential value is to multiply its current sales by a known multiplier or “score.” For instance, if Company A has $400k in sales, a multiplier of 5 would mean that the company has a potential worth of $2 million.
The revenue multiplier is often used by investors or potential buyers to determine the likelihood that a company will be (or will continue to be) successful. This type of valuation is typically reserved for people attempting to buy your business. It isn’t usually relied upon by business owners themselves.
Which Valuation is Best?
There’s no right or wrong valuation method, although it’s clear that some valuation methods will make a company appear more or less valuable. If you are considering selling your business or offering more shares of your business, speaking to a qualified M&A firm and/or an experienced accountant is one of the best ways to get the most accurate valuation analysis possible. IBEX Middle Market Business Brokers can help with that!
Staying financially literate about your business can help you make necessary decisions quickly and accurately, which can help preserve the life and growth of your company. Remember that the net profitability of your company is only one way to measure your company’s value. There are many other factors that investors and buyers examine during the process of purchasing your business or investing in it.
