A solid valuation is essential, whether you are seeking investors, are planning to sell or just want to know how much your business is worth. There are several methods to determine a company’s worth. The best option for you is based on your goals, as well as the current situation. In this article, Windes explores some of the most popular methods to find a business’s value, and then explains the pros and cons of each.
Book Value
The book value approach is a way of calculating the assets and liabilities recorded in your company’s books, including tangible and intangible assets, such as property, equipment and inventory. Net worth is the sum of assets and liabilities. This is a simple and quick method to determine the liquidation value of the business which is the sum that it would be worth today when all assets were sold at fair market value. Cons: This method might not take into account intangible assets and debts that have been acquired over time.
Revenue Multiplier
Another method to determine a business’s value is by calculating its earnings or sales revenues and multiplying that number by an industry multiplier. A virtual reality design studio, for instance could have a high revenue, but a low profit. However, a typewriter parts manufacturer could have a lower revenue, but a higher profits. This is a fantastic method to track growth and predict future earnings, however it does not take the long-term costs of business into account. This is why it’s ideal for smaller companies which don’t depend on huge capital investment or loans to run.
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