When was the last time someone asked you how much your business is worth? Have you ever had a business valuation performed? Would you even be able to quantify its value if someone put you on the spot?
The truth is that many small business owners don’t know how much their business is worth until they decide it’s time for an exit strategy, and they need to put a price tag on their hard work. It’s a mistake not to know what that number is at any given time – whether or not you’re ready to sell.
Here’s a quick-start guide to understanding business valuation, why it’s important, the best methods for calculating valuation, and the importance of reaching out for help during the process.
Not only can business valuation be complicated, but there are also actual emotions involved – yours, as the business owner. This could complicate things even further, as the sweat equity you put into your company is almost impossible to quantify.
The reason behind the valuation also plays a vital role in the final number. Are you planning to sell? What kind of buyer do you have on the line? Is the valuation for a lending opportunity? Or is it to prepare a pitch to investors? “Fair market value” of your business may mean many different things to the parties involved.
Ultimately, the most accurate valuation will come from working with an industry-accredited appraiser. These are experienced, qualified financial experts who work hard to understand best the current market and the value of businesses within it. There’s still an art to valuation, despite the mathematical work appraisers do to quantify your business as an asset.
While there is no singular formula for accurately valuing your business, there are some tried-and-true methods of calculating what your business is worth depending on the end goal of valuation.
Discounted cash flow: This method is based on the expected cash flow of your business. The real-time value of your business today depends largely on the money it will make in the future. Here’s how to calculate DCF:
Calculating the DCF involves three basic steps—one, forecast the expected cash flows from the investment. Two, you select a discount rate, typically based on the cost of financing the investment or the opportunity cost presented by alternative investments. Three, the final step is to discount the forecasted cash flows back to the present day, using a financial calculator, a spreadsheet, or a manual calculation.
Asset-based: Valuing businesses based on hard assets is a standard method, especially for those businesses that own real estate or expensive equipment. The dollar value of assets is added up, and liabilities (like debt) are subtracted to get a fair market value of your business.
Comparables approach: Using the comparables approach to valuation quantifies a business’ value based on competing, comparable businesses within the same industry. This less common valuation method leaves a significant margin for error; it’s not always easy to make an apples-to-apples comparison even if two businesses look nearly identical on paper.
Trust us – we know better than anyone how overwhelming it can be to gather the financial records and documents needed for accurate business valuation. If you’re like the small business owners we work with daily, you likely don’t have much time to spare for this process.
Simply put, every business needs a roadmap, a plan for getting from the initial stages to the ultimate goal. Of course, for a plan to be successful, it needs to consider the specifics. This is where the financial analysis of benchmarking comes into play, as it can provide an accurate breakdown of your business’ current standing in relation to the road ahead. This process also extends to forecasting, as the distance between you and your goals, and the best ways to close it, are also addressed.
Financial benchmarking also serves to:
The Alexander Group will cover every element of your business necessary to achieve your vision. As part of the benchmarking process, this can mean using regression analysis to project forward and establish what comes next. Whether it’s benchmarking, strategic planning or coaching for your general decision-making, The Alexander Group is fully qualified to help you move in the right direction. We’ll work with you to ensure your business supports your vision. Once a plan is ready to go, we’ll be there every step to ensure things proceed as they should. Contact us today to get started!