How to value a business – your questions answered

If you’re not a financial expert, business valuation can be a daunting task. With so many factors to consider and figures to compare, it’s difficult to know where or how to get started.  

Employing a business broker to help you navigate the complexities of the task at hand is the best way to manage this process. However, informing yourself of exactly how to value a  business is equally important. 

So, before you begin work on valuing your business, why not take a quick look at our answers to all your queries and questions on business valuation methods? 

What is business valuation? 

Business valuation refers to the general process of assessing a company’s economic value.  By taking into account a broad range of internal and external economic factors, all aspects of a company are evaluated, and their worth is determined using a series of valuation techniques. 

Business valuations are incredibly beneficial for many reasons. If you’re thinking of selling your business, are establishing a partnership or are looking for investors, it is a handy way to take a look into your company’s finances. 

Plus, even if you’re not planning to sell, share or invest, business valuations are still a great way to better understand the economic framework of your business. Finances can easily become pretty complicated, so keeping an eye on your company’s worth through a business valuation helps to keep finance simple. 

What affects a business’s value? 

Business value is constantly exposed to change and fluctuation from both internal and external business factors. 

Some examples of internal factors which may affect business value include changes in management and workforce talent, along with fluctuations in the debt-to-equity ratio. Due to the internal nature of these factors, business owners may find it easier to drive in a positive direction.

External factors, on the other hand, are less easy to predict and control. These are challenges imposed on a business from the outside economic environment, including market stability,  inflation and consumer demand.  

Understanding how different factors can affect company value is key to maintaining a  successful business and helps demonstrate the advantages of business valuation methods. 

What are the 6 main business valuation methods? 

So, how do you go about working out what your business is worth?

Market capitalisation 

When it comes to calculating business value in a fast and simple way, market capitalisation is a useful method to employ. 

This valuation technique involves multiplying company share price by the total number of shares that it possesses. This calculation then results in a figure which reflects estimated company equity, or in plain terms the value of your company’s stock if it were to be liquidised. 

As most businesses are financed by a combination of debt and equity, however, market capitalisation can fail to accurately depict the balance between these two factors. This makes the method a better means of demonstrating business size rather than the real value of a  company. 

As such, to accurately determine the value of your business, a more comprehensive method of business valuation could be your best option.

Times-revenue 

Times-revenue is a popular method used to determine the value of revenue-based businesses. Here, revenue generated over a certain time period is multiplied by a value sum which is based on the current economic environment of your company’s industry. For example, a booming industry would hold a higher economic value than one growing at a  slower rate. 

The method is very useful if you’re looking to gain sight of what constitutes a good selling price for your company. In taking into account the projection of your industry, the future profitability range of your company will be established. 

In terms of depicting a more competitive business value, however, a times-revenue valuation is less useful. In working out company value using revenue rather than profit, the method does not consider how annual cost and market fluctuations may negatively impact a  company’s overall profit. 

A times-revenue valuation model situates a company’s value within the market, so if you’re thinking of selling your business, this method will certainly have benefits for you. 

Discounted cash flow (DCF)

Discounted Cash Flow (DCF) is a reliable form of business valuation which calculates value using projections of future company cash flow. 

A DCF technique will take your company's cash flow forecasts and discount them as if they were to be liquidised in today’s market. In doing so, external market factors such as inflation are taken into account. 

Recognition of the potential impact of external factors on company value is a major strength of this business valuation method. DCF does, however, make assumptions about cash flow projection and terminal value, this is something to be aware of when interacting with these figures. 

Book value 

Another relatively straightforward approach to valuing a business is through calculating its book value. Like market capitalisation, however, the simplicity of this method causes some oversights which lessen the accuracy of book valuation. 

When calculating book value, a business broker will take your company liabilities (also referred to as debts) and subtract them from the number of company assets. Here, asset value is determined by historical figures in your books, hence the title of the method. 

As a relatively surface-level means of calculating business value, book valuation fails to account for intangible assets such as the value of your workforce. Although this makes the method less accurate for depicting true company value, book valuation may be useful if you’re seeking a rough estimate of the shareholder equity of your business.  

Liquidation value 

‘Liquidation value’ refers to the net cash value that your business would retain if all of its assets were to be liquidated, and liabilities paid off in today’s market.

This simple calculation sees company liabilities subtracted from assets. It differs from book value, however, in that liquidation value is calculated at the current market level, whereas book valuation takes into account a company’s historical pricing. Book value is most often higher than liquidation value as a result. 

Liquidation valuation is often implemented when a business has gone bankrupt and therefore needs to sell its remaining assets. It is also useful for calculating how much return investors may receive in the event of a company bankruptcy. 

Earnings multiplier 

The earnings multiplier, also known as the price-to-earnings ratio (P/E), compares your company’s share price with its earnings per share. This produces an accurate estimate of business value as figures are calculated using profits rather than revenue.

To calculate P/E value, the current stock price is divided by earnings per share. This makes an earnings multiplier valuation a great way to determine the value of assets in comparison to the market, and also a helpful means of assessing your company’s growth potential. 

It’s important to note that an earnings multiplier assessment does not take debt into account. If you’re preparing for a company or shareholder sale, you may therefore find this method of business valuation a little less useful. 

How can a business broker help you get the best price for your business? 

When proceeding with a business valuation, it’s always best to call in the experts. A business broker will not only provide specialist insight into valuation techniques and current market trends, but they will also point to areas of strength and weakness within your business. 

If you’re evaluating your business ahead of a sale, a broker will also be able to help you both advertise and negotiate your sale. In taking the pressure of the sale away from you and your company, a business broker acts as the middleman in supporting your aims and needs. 

Find the best business broker at a great price with SpotDif 

Business valuations provide an endless number of benefits for any company. If you’re preparing for a sale, are establishing a partnership or are just generally seeking to determine the worth of your company, why not get started today with a helping hand from SpotDif? 

Our search tool allows you to compare a huge range of financial services and is sure to help you find the perfect business broker for the task at hand. Using SpotDif helps make business valuation simple. Start searching now to find the best broker for you.