How to Valuate a Business

How to Valuate a Business – Determining a Business’ Value

How much is a business worth? While some businesses will have their worth based on revenue, others will find that their worth is tied up mostly in their assets. It can be a rather confusing task and one that is judged differently by each business. When trying to learn how to valuate a business properly, there is only one right answer – it depends. The following methods, however, are the most widely used.

Income Multiples

Yearly income plays a big role in the value of a business. If a roofing company relies mostly on their employees to run the business, they will typically use an income multiplier to figure out their overall value. This is done because there are no products being sold and the equipment used is negligible. Therefore, the income stream that a business sees will be of the utmost importance.

First, there has to be a yearly figure that is used as the value being multiplied. This is typically the yearly profits seen. The goal is to multiply this number by 3. If a business sees 100,000 dollar profit a year, they can expect to sell the business for $300,000. This is obviously dependent on the type of business, its assets as well as inventory. If a business is mobile and really does not have an inventory or assets to consider, this method will be used.

Assets

The inclusion of assets in the total worth of a business is important. If a hotel owns the building and land that they occupy, the cost of the business goes up dramatically. Depending on the location and the land itself, a business may increase its overall value tenfold. There are also other assets that need to be considered in the complete valuation of a business. Among these include:

Land – Any land owned or occupied by the business will be included at a fair market value.

Equipment - Some pieces of equipment sell for hundreds of thousands of dollars. This adds to the overall valuation price as well.

Contracts – Standing contracts should also be included as an asset and will need to be considered.
There are numerous businesses that have most of their value tied up in their assets. A ski-resort is a prime example of a business that is built on the right location. If the resort owns the land, it will be much more valuable.

Liquidation Value

Some businesses are purchased simply to be liquidated. This can be to lower competition levels or to make a modest profit off of the company’s assets. What occurs during this time is that all of a company’s current assets will have to be determined and a value of these assets will have to be calculated. Once this is done, the overall value of the business will be the market price for all of the assets that they own. The goal behind this type of valuation is to simply sell of all of the assets within a 12 month span. This is often seen with bankruptcies that leave lenders with no way of recuperating their money. Instead, the business is transferred to the bank and liquidated so that they receive their compensation.

Future Income Projections

Growing businesses may not want to sell their business based off of their current income levels. This is because the business is growing at a fast rate and the value of the business far exceeds last year’s income totals. A good example of this would be Facebook. While sparse revenue comes into the business in comparison to its high valuation price, this does not mean that future projections are not higher. Considering the company’s growth in revenue from year to year will also have to factor into the total value of the business.

Current Market Rates

If other businesses in the area are selling, it is often easier to look at their financials and data to determine a roundabout figure. If a restaurant sells similar food and has similar profit margins, chances are that their price is around the price that your business is valued at. However, this should only be used as a means of estimation and will not be seen as a viable method of final valuation prices.

Using a Professional Valuator

There are professionals that will be able to lend their services to you to help you determine the value of your business. While they will likely use the methods mentioned, it is a much safer bet to go with a professional than to do it by yourself. Not only will your business valuation be calculated more precisely, it may even be worth far more than what your initial estimate had been.

The means of determining how much a business is worth will leave a business owner with a lot of questions. However, when selling a business, it is essential to know just how much it is worth to determine the selling price.

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