If you’ve ever considered selling your business, you might wonder what the right way is to determine your business valuation. Business valuation involves looking at a number of complex factors, to assess the tangible and intangible value of a business. Some intangible elements such as goodwill could make company valuation seem challenging.
Here are the steps involved in the valuation of a company:
Value your assets: When it comes to asset valuation, begin with the tangible assets which include equipment, office furniture, machinery if any, computers, inventory, etc. Valuate these assets and then move on to the intangible assets such as goodwill, patents, trademarks, incorporation papers and so on. Sweat equity and employee valuation is equally important, so do ensure you include them as well in the business valuation.
Calculate ROI: Calculating ROI is one of the most crucial steps in the valuation of a company. It is one of the most widely used methods to value companies, and is calculated with the formula Net annual profit/purchase price x 100. You can also calculate the ROI of your industry with the help of your accountant in order to assess where your company stands.
Determine market value: Another approach to company valuation is to find your company’s earning potential. This is all about studying and estimating your market, its size, the projected growth, the competition and the possible barriers to entering the market. If your market is big and has high growth projections, your startup will be worth more. Goodwill and other intangible assets can also add to your market value.
Get professional advice: Consult your financial advisor, or accountant on the impact that the sale of your business can impact on your financial position. They will also be able to help you with finding potential buyers for your business, and possibly could help you with their own contacts as well.
Consider the economic climate: There are certain times when it is better to do a company valuation while at other times it may be advisable to neither sell it nor do a valuation of business. If the economy is experiencing a downturn, hold off on it. A favourable economic climate will only help your company achieve a better assessment and will increase its value.
Cost of creating the business: Another method of business valuation is to determine what the cost of creating the business would be. In other words, if someone had to create the same business from scratch, what would their investment have to be? The costs would include product development, customer acquisition costs, equipment, staff hiring and so on.
The valuation of business is a complex exercise involving a lot of different factors. For small businesses, it is imperative that they consider every possibility before opting for a full company valuation and to assess the goals of getting the business valued, whether it involves selling it, or valuation for potential investors or acquisitions.