5 Ways To Calculate How Much Your Business is Worth
What is my business worth? Naturally, ways to calculate how much your business is worth often one of the most challenging aspect of the prospective business owners. However, it doesn’t need to be an herculean task or difficult thing to do so far you read and understand the almighty ways to be explained with passion in this content.
Above all, be enlightened that calculating how much your business is worth is really not a science but an art- It’s subjective!
There is this very good friend of mine- a successful aluminum profile retailer, who was about to calculate how much his business is worth, surprisingly, he valued the years of his hard work into his calculation, but quite unfortunate, this has no business or element whatsoever being in calculating what a business worth.
Do you know how to calculate how much to sell your business for?
Are you tired of your small business and feel like trying another one? Do you need the techniques, methodologies and ways to calculate how much your business worth? Any approaches you may view this, clicking on this page to read this piece will really worth the time spent at the end of the article.
Not to bore you with preamble, here are the reasonable and reliable ways to calculate how much your business is worth.
HOW TO VALUE A BUSINESS
1. Assets Valuation
You can start calculating how much your business is worth by looking vividly at the value (worth) of the business assets. What does the business has in store? What equipment? Inventory? And others, since if you’d have to start the same business from scratch you will need to acquire all those items, so the business balance sheet will be in the best position to give out a good indication of the real value of the business assets.
Valuing the assets of your business and arriving at an appropriate price is the first way you can use to calculate how much your business is worth.
2. Discounted Cash-Flow
While calculating how much a business is worth, Warren Buffett made use of a method known as discounted cash-flow analysis. To make use of this analysis, you are expected to look at the rate of the cash your business generates every year, projects the result into the future then calculate duly the worth of the cash flow stream- “discounted” making use of the age long rate of Treasury bill interest.
To make it clearer, you are to divide the yearly earnings by the long-term rate of Treasury bill interest and arrive at the appropriate worth of your God owns business.
3. Rules of Thumb
To adopt this system in calculating how much your business is worth, the selling price of various businesses-apart from yours will be researched and use as percentage of revenue or multiple of the cash flow.
“Rule of Thumb” method seems to be too general because it’s difficult to locate any two businesses that have the same attribute in dealing with transactions.
However, calculating the business to know how much it worth should be done based on what the business owner do generate from his own side, since the business future will be determined by the score of the previous historical financial data.
Notwithstanding, I opine that the “Rules of Thumb” analysis or methodology is also a good place to begin with but it’s little too broad to be considered by itself.
4. Owners Benefit
The Owner Benefits methodology is based on the total amount of dollars that you expect to have available from your business based on what you have earned and generated in the years back.
The good thing about Owners Benefit is that it doesn’t try predicting the future…. It isn’t cash flow! But sometimes called Seller’s Discretionary Cash Flow (SDCF). History has shown and proven that Owner Benefit is the most effective.
The formula applicable to Owner Benefit is:
Pre-Tax Profit + Owner’s Salary + Additional Owner Perks + Interest + the Depreciation Allocation for the Capital Expenditures.
5. Income Multiple
Multiple earnings or income multiple may also be a simple way to think about calculating how much your business is worth. Let assume an investor made a profit of $15,000 in his business, that money can serves as dividends or be used to grow the shareholders.
Now, estimate the cash generating for the next coming years and see how much the income stream will worth to you. This is one way to value a business based on revenue.
Be enlightened, though that the earnings will not be stable due to supplier price changes, declining industry and competition. This factor is going to affect the money earning. Ensure you reflect this in your projections, if you can do this without rush, you will excel in calculating how much your business is worth- in case you want to sell it off.
To round it off, if you know not how to read or an income statement, it is advisable you learn it now. It’s crucial, in fact, a must if you actually want to be successful for real in this process.