How do you determine the value of a business?

Are you looking to sell your business, or are you just curious about how much it might be worth, so you can plan for a possible future sale?

Either way, it’s best to brush up a bit on some basic business valuation pointers, just so that if a sale is on the cards, you can set a value that’s fair for all, and profitable for you.

So, most valuations will be based around the numbers – and this is easy to understand. Valuation professionals will look to determine the health of a business through financial history and cash flow, because it is via that data that investors confirm worth for their time and money. But that’s only one part of the equation. What is of even more importance is how sustainable those cash flows will be in the future.

Here are three quick ways you can establish a feel for what your business may be worth.

How is the value of a business determined?

Profitability

Valuation professionals will look to your business’s past profits and cash flow when determining your income value. This is simply to get a window into the inner workings of how your business makes money, and how efficient it is at paying off debts. This provides a snapshot at how healthy your business is at a point in time (typically the end of a fiscal year).

One area to which you should pay particular attention is in the expenses you run through the business. You will want to be sure to present financials that only have expenses that are essential to running the business – back out those personal expenses for cars, family vacations and other costs that you have taken as an owner of the business.

Market Multiples

Market value is determined by what buyers are willing to pay. This is established by direct comparison – taking your business and the product or service it provides and comparing it directly with other similar businesses in the market. Find out what the market multiples are for your industry. These vary greatly from industry to industry, size of company within an industry and the growth prospects for each industry.

Unique Capabilities

While your profitability indicates the health of your business today and there may be a wide span of market multiples in your industry, the element that will ensure you get the highest valuation is related to the unique capabilities – or what we call the strategic assets – of your business. Having the ability to articulate and demonstrate how your people systems and processes will continue to drive business growth in the future will enable you to garner a higher industry multiple.

These are just three very top-level aspects of business valuation. Professional business valuations may encompass other factors to determine value.

Are you interested in determining the value of a business? Contact Destined today. We have business consulting services that will set you on the path to a fair and profitable sale – whether you’re ready right now, or whether you’re simply putting a plan in place for the future.