How To Establish Business Valuation

Knowing your value is critical to knowing your business future

how to establish business valuation

Knowing how much your business is actually worth can be a valuable piece of information in a lot of situations.  Whether you plan on selling at some point or you simply want to know how much of your business you can put up as collateral against a loan, you gain an important piece of leverage when you are fully aware of how much your company is worth. 

However, determining the valuation of your business may not be so clear cut and you may be entirely unsure of how to reach this figure and what factors you should take into consideration.

  To get you started, try to establish your business' valuation by following these simple, yet financially meaningful steps.

Establish Your Company's Base Price

Figuring out your company's base price simply involves adding together your past two years' worth of net incomes as found on your income statements.  Your business' net income, of course, is the amount of money you have left over each year after you deduct your total business expenses.

However, you should also adjust the base price of your business to allow for factors like:

After you adjust these figures accordingly, you should have a reliable figure that you can use as your company's base price.

Determine the Value of Your Business' Assets

Another important part of figuring out how much your company is worth involves determining the value of your business assets.

  If you own assets outright, you will need to determine their worth to reach a number that will determine the overall value of your company. 

Assets that can be included in this valuation process include:

  • Real estate
  • Vehicles
  • Equipment
  • Inventory
  • Leasehold improvements

To determine what these possessions are worth, you also must take into consideration any appreciation or depreciation of these assets.

  For example, if you know your equipment will depreciate in value within the next few years, you should make that allowance instead of including the value of the equipment when you first purchased it.  These allowances will give you an accurate number that you can use to determine the overall value of your assets.  This number can then be added to the base price of your business.

Adjust for Intangible Factors

As you must make adjustments for expenses and depreciation of assets, you also must consider any adjustments that must be made for factors that are intangible and perhaps beyond your control.  Any number of factors can play a role in increasing or decreasing the value of your business.  For example, if your business has a stellar reputation and only requires minimal management, these considerations should add to the value of your company rather than detract from it.

Alternatively, if your company is located in a less than ideal neighborhood or on a plot of land that is valued at below the current market value, these factors can take away from the valuation of your company.  Even so, to get an accurate figure you must allow for these factors.  When you do, you have the number that you need to know how much you could sell your business or what it might be worth if you need to borrow against it.

 

Every business owner should know how much his or her company is worth.  In an ever competitive marketplace, people who own their own companies cannot afford, literally and figuratively, to leave this valuation up to chance.  Instead of guessing or simply not making an effort to figure out what their businesses are worth, they should learn the process of valuating their companies. 

These relatively effortless steps can go a long way in giving you an idea of how much your own company is valued at and what you may be able to sell it for if you are ever so inclined.  When you have this number at your disposal, you have an important piece of information that gives you more control over your business and your finances.