For most entrepreneurs, their business is their largest asset. Every business owner should get his business valuation done in order to know where the company has been, where it is at present, and most importantly, where it is heading in the future. Business valuation can be simply defined as the price a reasonable person is willing to pay to own the future cash flows of a business. Every single business owner should know how much their company is worth right now, rather than just caring about it at the end, when they are thinking about selling the company. Here's a quick guide to help you figure out what your business is worth.
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It is easy to understand the financial history of a company by browsing through its business data. However, in order to know its real value, one needs to review the business from all contexts. If the business is a local firm in a small town, one needs to take into consideration how far the office is from the nearest highway or a major city, the business's existing relations with its customers, and how many competitors it has in the surrounding area. Analysing the business from all angles will give the potential buyer a true estimate of its actual worth.
In order to arrive at the actual value of your business, take a look at how much similar businesses have sold for in the past. While making these comparisons, ensure that both companies are of the same size and that they sell their products and services at almost the same value. If you're unsure as to how to go about the process, get a business valuation expert onboard. Knowing how much competitors have sold their companies for not only gives you a context, but also has statistically proven to be an accurate predictor of how much a business is worth.
Reviewing assets can help determine the value of your company in case you are shutting down your business. In such a scenario, it is necessary to also have a machinery and equipment appraiser value the assets that can be resold. Your hard assets will be examined for their liquidation value since the business would be worth more when taken apart and sold off as compared to when sold as a whole.
As mentioned earlier, a very important factor of business valuation is knowing where your company is heading in the future. Is your business taking off or is it flat? A growing company should put together projections for what the next three or five years will look like with regards to revenue, expenses and earnings. When a business owner factors his company's future earnings into the business valuation, he strengthens his case in front of potential buyers.
From using wrong valuation multiples to failing to assess your company-specific risks, there are several traps that business owners can easily fall into while calculating the worth of their business. By using the above mentioned steps, you can make the process easier and more fool-proof.