How to Value a Business - The Full Guide

By Samantha Clark

Jul. 21, 2022

259

No matter how big or small a company is, that business will be worth a specific amount. That amount is known as the value.

The value of a business is calculated based on a number of different factors, and this is why valuing a business isn’t as easy as you might expect. After all, you’ve probably seen an episode of Shark Tank where the people making the pitch have vastly overvalued their business. So, how do you value a business?

Well, in this guide, we will be taking a look at just that! So if you want to find out how to value your business, and lots more, keep on reading!

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Table Of Contents

What is the Value of a Business?
How to Value a Business
Why Might You Value a Business?
Summary

business paper

What is the Value of a Business?

First things first, let’s take a look at what the value of a business is. As the name suggests, the value of a business is the total cash value that can be attributed to that business. When you calculate the value of a business, you are calculating the market value. This means that this valuation is what you should expect to get for the business if you were to sell.

The market value of your business can be calculated quite easily. In order to create a valuation, you need to have good knowledge of the company. This will include knowledge of everything that the business owns, and also the knowledge of any debts that the company has. Without this information, you will be unable to calculate the value of your business.

With that in mind, let’s take a look at how to value a business.

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How to Value a Business

As we have mentioned, the value of a business can actually be calculated pretty easily. In order to calculate the value of a business, you simply need to have knowledge of everything that the business owns. You also need to have good knowledge of everything that the business owes. With these figures in hand, you will be able to calculate the value of your business.

Everything that the company owns will include a number of things. If your company has bought any equipment (i.e., computers or machines) this will be included in the valuation, so will any buildings, vehicles, etc. Likewise, any cash that can be attributed to the company will also be included in the valuation. These fixed and liquid assets combined will be classed as what the business owns. But, this alone is not the valuation of the business.

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The majority of businesses will have either debts or liabilities. Especially if the company is still in its infancy. Debts and liabilities aren’t a bad thing, but they will be included in the business valuation. The value of these debts/liabilities will be subtracted from the asset value of the business when completing the valuation.

So in short, if you want to get a quick and easy valuation of your business, you simply need to begin by working out the cash value of everything that your business owns. Calculate the cash value of every building, car, piece of machinery, etc. that your company owns, and add these together. This figure combined will be the asset value of your business.

From there, you will need to subtract the liabilities of the company. As mentioned, this will include any debts, loans, etc. that were necessary to get started. If you have used multiple lines of credit to kick-start the business, then you might owe money to a number of different lenders. Until these are paid off, they will be considered as debts, and as such a liability. Add all your liabilities together to calculate the total liabilities for the company.

With these two figures in hand, simply subtract the total liabilities from the total asset value of your business to get a quick valuation. In short:

Business Value = Total Assets - Total Liabilities

So, if you want to easily get a valuation of your business, you should use the calculation above to get a good idea of how much your business is worth. But, why might you value a business? Let’s take a look!

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Why Might You Value a Business?

We’ve discussed how to calculate the value of your business, but what we are yet to speak about is why you might value your business. So, let’s find out.

Well, there are a number of different reasons why you might value your business. In general, even if you aren’t planning on doing anything with the valuation, it is a good idea to calculate this figure from time to time. Looking at the value of your business can help you see how the business has grown, and it can help you set goals for the future.

But, the main reason why you might calculate a valuation of your business is if you are thinking about selling or buying. There are lots of circumstances why you may consider selling, and they aren’t all because you want to give up the company. For example, you might need to get a valuation of the business if a business partner is looking to sell their shares and you want to buy them out.

Alternatively, you may need to calculate the value of your business if you are going through a divorce, or even for tax purposes. In short, there are lots of reasons why you might need to value your business, and it doesn’t all come down to you hoping to sell.

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Summary

In conclusion, valuing a business isn’t as tricky as you might expect it to be. As long as you have a good idea of everything that your business owns, and everything that your business owes then this is something that you can calculate yourself.

In order to value your business, you simply need to subtract the total liabilities from the total assets, and this figure will be the valuation of your business. Of course, if you want a professional valuation, this is something that you can look into too.

So, if you want to get a quick valuation of your business, there is no need to stress! Simply use the formula above, and you will have a value for your business in no time.

While on the subject of business it would be wise to point out the importance of keeping the financial side of things in order. Our pay stub generator makes life easier for those who might struggle with financial filing.

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Frequently Asked Questions

To calculate the asset-based value of your business, follow these steps: 1) Prepare a list of all your business's assets and liabilities, including tangible and intangible assets. 2) Determine the fair market value of each asset and liability, which may require appraisals or other valuation techniques. 3) Subtract the total value of liabilities from the total value of assets to arrive at the net asset value (NAV) of your business. This NAV represents the asset-based value of your business.

To calculate the income-based value of your business using the discounted cash flow (DCF) method, follow these steps: 1) Estimate the future cash flows your business will generate over a specific period (usually 5-10 years). 2) Determine a discount rate, which reflects the time value of money and the risk associated with your business. 3) Discount the future cash flows using the discount rate to obtain their present value. 4) Calculate the terminal value, which represents the present value of cash flows beyond the projection period, using a perpetuity growth rate or an exit multiple. 5) Add the present value of cash flows and the terminal value to arrive at the income-based value of your business.

The appropriate valuation method for your business depends on its nature, industry, financial performance, and the purpose of valuation. Generally, the asset-based approach is used for businesses with significant tangible assets, the income approach for businesses with stable cash flows, and the market approach for businesses with comparable transactions. It's often beneficial to use more than one valuation method to gain a comprehensive understanding of your business's value. Consulting with financial advisors or valuation experts can help you choose the most suitable method(s).

There are three primary methods for valuing a business: 1) Asset-based approach: Considers the value of a company's assets and liabilities. 2) Income approach: Estimates the business's value based on its ability to generate future cash flows or profits. The discounted cash flow (DCF) method is a common technique in this approach. 3) Market approach: Determines the value of a business by comparing it to similar businesses that have been sold, using valuation multiples such as price-to-earnings (P/E) or price-to-sales (P/S) ratios.

Valuing a business is crucial for various reasons, such as selling the business, raising capital, estate planning, and tax purposes. A proper business valuation provides an accurate assessment of a company's worth, assists in making informed decisions, and helps in negotiating a fair price during transactions.

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