Payday Installment Loans Near Me in North Las Vegas, Nevada
Fast Online Approval Money & Cash Advance Lenders (offline stores)

---

"How To Value Your Business"

---

In this modern day of tech and digital startups, we seemingly always hear the news of businesses bought and sold for millions of Dollars every other day.

Such phenomenon may then beg the question; how did they value the selling price of the businesses? In this article, we will discuss the basics of how to value a business. If you are in the middle of purchasing an existing business, this can help you determine whether it's a bargain or overpriced.

For business owners, this knowledge can also help you increase (or decrease) your business valuations in case you are aiming to sell the business either partially or totally.

Without further ado, let's discuss some of the methods for valuating a business.

Assets-based

Asset-based valuation is the most basic way to value a business, by calculating the value of its assets subtracted by its debts.

For example, a restaurant can have kitchen equipment, furniture, bar equipment and many others as its hard asset. The resale value of these pieces of equipment, furniture, and any other hard assets are the hard asset value of the company.

This method is usually only used when a company does not have any 'goodwill' value anymore and is the lowest possible value of a business. Goodwill value is defined as the difference of the company's market value (the price a potential buyer is willing to pay) and the net value of your assets.

Cash Flow

In this method, the business is valued by estimating the future possibilities of cash-flow streams. In general, this method is aimed to figure out how much profit the business can be expected to make in the next few years.

Usually, once the buyer can estimate the value of your business in the future (for example, if they are willing to sell it again), they will apply a "discount rate". Hence, this method is also often called discounted cash flow method. The discount rate can be determined by many factors, how risky your industry generally is, the purchaser's cost of capitals, and many other factors.

As a business owner, the main drivers that will determine your business's value when using this method are:

1. How much profit is your business expected to make in the future?
2. How reliable the value is (i.e., will your potential revenue be affected when an unexpected recession happens)

Comparables

This method is another common valuation technique, where your company's value is determined by looking at the value of similar companies sold or publicly traded recently.

Commonly, this method determines the value of a company based on a certain multiplier of the annual revenue. For example, security companies are commonly traded at two times their annual revenue, so if the annual revenue is $10,000, the company can be traded for $20,000.

The multiplier value will vary depending on types of industries, and this is why tech companies can be sold for millions because the multiplier is relatively high.

However, you should remember that although Fortune 500 companies in your industry are traded with say, 20 times the revenue, smaller business won't be valued with the same multiplier.

Bottom Line

Remember that valuation methods are either/or rather than a combination. Generally, different types of industries will be better off with one valuation method over the others. For example, a professional services company with little hard assets will gain a better valuation using a cash flow method, while a restaurant or hotel will be better off with hard assets valuation.