Do you have a start up company? Do you need to calculate the value of your business? This can be a daunting challenge. Many entrepreneurs have to ask others “How do I go about calculating the worth of my business?” This is not as straightforward question as it may seem.
When you need to know how much a business is worth, the process is known as a small business valuation. To get to that value, there are a number of different methods. Unlike many of the values and the economic data businesses have to deal with, the small business valuation is very much a subjective value. It is not absolute. When you are looking into the valuation of your business, you need to ask yourself, “Why am I calculating the value of my business?” The reason for this is that the reason or reasons you want to determine your business’s value has a direct impact on the final value.
- Talk to corporate finance firms or accounting firms. When you are looking into starting the small business valuation process, you can be helped along by their opinion. Ask objective, outside financial and accounting experts to put a price tag on the company you have created.
Ignore people who tell you to get a formal valuation. There are some people at small business valuation services companies who will try to convince you to get a formal valuation for your company. This is a waste of time and money, If you are getting the valuation to sell your business, anyone interested in buying will conduct their own assessment. The only time that it makes any sense to get a formal valuation is if you are selling your family’s business to existing shareholders. These formal valuations are expensive and overrated.
- Look at the state of your industry. How well are other companies in your industry doing? How well is the overall business sector doing? Is there any room for growth or is it shrinking? Look at businesses who compete against you, what your role is and what changes are happening in your industry.
- Look at similar companies to yours that have sold recently. If a business in your industry, with a similar size and structure was recently sold, the price it went for can give you an idea of what your business is worth. If you are wondering, “How do I go about calculating the worth of my business?” looking at how much these companies sold for to get a good sense of how valuable your business really is.
- Look at the different small business valuation methods. You have several options for determining the valuation for your company. If your business has many intangible assets (these can include your talent and your inventions), you should use the “asset based valuation method.” If you have some debt in your company, a good method is the “earnings before interest and tax” (EBIT) method. If you have a product that has not yet been commercialized, the best method is called the “discounted cashflow” method which looks at your future revenue streams.
- Be objective and realistic. It can be really hard to leave your emotions at the door when you are working on the small business valuation for a business that you have put your blood, sweat and tears into. When you look at your business, you see more than what you balance sheet says. You see the potential your business has and you are looking through the prism of what you want to accomplish with you company. To get the most accurate valuation for your business, you will have to try to be objective.
- Be honest. You need to be as brutally honest as you can be when it comes to reporting your earnings and your liabilities. If you are promoting your business to investors or are looking to sell, lying or inflating anything will hurt your integrity and compromise your goals and negate the reason you even asked, “why am calculating the worth of my business?”
If you find yourself with the question, “How do I start calculating the worth of my business?” you should bring in some help, compile your data and get started.