How to Value a Business – The Basics of Company Valuations

With an estimated value of $926 billion, Apple currently ranks as the most valuable business in the world, followed closely by Amazon at $777 billion. While these two companies are great success stories with gigantic valuations, each business has its own value. Understanding how business value is calculated can be confusing, especially for small business owners. To clear up some confusion, let’s take a closer look at how to value a business, what factors determine overall valuation, and how it all pieces together.

How to Value a Business

Historic Profits

There are many ways to value a business. One of the most common methods of determining business valuation involves analyzing the company’s historic performance, profitability, and future guidance. An investor or buyer, for example, may pay five to 10 years worth of the business’s past profits. Although this method may be somewhat crude, it’s an effective way to get a general idea of a company’s value.

Assets

Another way to determine the value of a business is to analyze its assets. This includes but is not limited to cash, unpaid invoices, equipment, inventory, investments and owned property. Owners should review their business’s balance sheet while adding up all assets. Next, they should deduct the total value of their liabilities from this amount. Liabilities may include business loans and other forms of debt. If a business’s liabilities outweigh its assets, it may have little or no value to prospective buyers.

Business Valuation Calculators

There are also calculators available online that help determine the average value of a business based on information such as its earnings, growth, financial risk, etc. The Calc XML calculator is a good starting point for business owners who want to valuate their business. It’s important to note that online valuation calculators are not always entirely accurate. After all, no two businesses are exactly the same. A calculator is a great place to begin, but it’s only one piece of the business valuation puzzle.

Professional Valuation

The most accurate way to value a business is to seek a professional valuation. There are professional business appraisers who will analyze a business’s revenue, expenses, assets, liabilities, market drivers, challenges and other criteria to determine an accurate value.

Owners can expect to pay more for a professional valuation than a DIY valuation, but it’s a far better and more accurate way to determine how much a business is truly worth.

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