A business valuation is a method that calculates the value of an enterprise. It is essential to report financial information and other purposes like dispersing shares, selling your business or part of it, making succession plans, or obtaining financing.
The value of a company can be determined by its assets, earnings, or market potential. The most popular methods of valuing a business include the earnings-multiples or times-revenue method and the discounted cash flow (DCF) method.
The method of times-revenue or earnings-multiples is a method of taking your business’s revenue and earnings and divides it by an industry-standard multiple to arrive at the value. This is a great way to get a sense of what your business’s worth, but it doesn’t paint a complete picture. A restaurant that earns $250k per year, and is valued five times that amount, might be worth more if it’s run by a strong brand or a excellent dining experience.
The book value formula is another method that is used widely. This method adds the assets you have, including real estate, equipment and inventory and subtracts liabilities, which are outstanding debts and loans. This method is simple and simple, however it might not reflect the true worth of your business, particularly when you are considering potential growth. Buyers and investors tend to be more interested in the future potential profits than in the assets currently. It’s important to have an appraisal complete by a professional appraiser or broker prior to deciding to make an investment with an outside company.