Knowing how to properly value a business is very important. Whether it is to invest, sell a business, start a new business, or even lend money, you need to be able to determine what a business is worth. If you are able to come up with an accurate estimate for a business’s value, you will be able to determine whether you are making a sound investment. There are several tips that should be followed that could help you to properly value any business.
Know the Numbers
When you are going to value a business, the most important thing that you need to do is properly know the numbers. The financial performance of a business is the largest driver of the value of the company. You should be able to review income statements, cash flow statements, and balance sheets for a few year period to figure out how much money the company actually makes.
Industry Multiples
Once you know what the cash flow for a business is, the next thing that you will need to do is apply multiples to the cash flow. A very common way that businesses are valued today is by either applying a multiple to the revenue or EBITDA or a business. However, the actual multiples that needs to be used will vary from one industry to the next. It is important that you spend time analyzing recent business sales in the industry to figure out what the appropriate multiple is for this business.
Balance Sheet
When you are trying to figure out the value of a business, one of the best things that you could do would be to look at the balance sheet. A balance sheet is a record of all assets and liabilities that a business has. This can include cash, accounts receivable, loans, inventory, and hard assets. At the end, you will see a number that will reflect the net worth of the business. However, when you do this analysis, you will also have to dive deeper into some categories. For example, a company may have A/R that should not be considered collectible. This is then a toxic asset that should not be included in your valuation.
Future Growth
One of the harder things to value is the potential growth of an organization. If you are buying a company that is in an industry that appears poised for growth, or if the company has grown a lot recently, it is fair to assume that the growth will continue. Because of this, you need to apply this assumption to your valuation as well. This process should include analyzing future projections and figuring out what is feasible. You should then be able to figure out the future value of the company based on projections. This future value should then be discounted by a certain rate when coming up with the current value.
Areas of Improvement
If you are looking to invest in a business, you may also be able to notice areas of improvement that the current owner has not considered. This could include finding ways to cut costs or improve revenue. This may allow you to add to the standard value while also getting a great deal.
Personnel
In many cases, the value of the company is largely driven by the personnel that is employed. If you are going to be buying a company from a key individual, the value could decline when the seller is no longer involved. This can be a hard item to value, but an assumption needs to be included in the analysis. To help protect the value of the company, you should make the sellers sign a non-compete agreement and even a consulting agreement to continue to work post close.
Don’t Be Emotional
Ultimately, when you are going to value a business, the last thing that you want to do is to get emotional. If you are trying to sell a business that you are passionate about, it is easy to believe that your business is worth more than it is. While you could love your business, you still need to have a non-emotional way to value the company. This will help you to arrive at a fair valuation.
