ENTREPRENEURSHIP / MAR. 09, 2015
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How to Value a Business

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Are you considering buying or investing in a business or company in your area? If so, it’s important to know how much the business is worth. That will allow you to determine if your investment will be repaid or not.

See also: Top 6 Questions you Need to Ask When Evaluating a Business for Sale

If you want to evaluate what a business is currently worth, there are a few things to take into account:

Assets

What assets does the company own? What sort of equipment do they use? What inventory do they have on hand, and how much is it worth? Assets are anything that the company OWNS (free of debt) that can bring in revenue. The more assets a company has, the higher its potential value.

Revenue

This is a fairly crude marker of value, but it is one of the metrics you can use to value the business. If the company earns $10,000 per month, you can estimate the revenue stream to be $120,000 per year.

Profit Margin

This is a more accurate method of determining the company’s value. The profit margin means the company’s income after expenses and overhead. The higher the profit margin, the more lucrative a company has the potential to be.

Liquidation Value

If the company had to sell everything and close its doors overnight, what would it be worth? This is a good way to calculate the value of a business that is currently struggling.

Rule of Thumb

This is the term for the rough value of a "like" business (a company of similar size and sales to the one being valued). It is definitely not the most accurate marker, but it will allow you to have a general idea of what the business is worth.

Probably the best way to value a business is to assess it in terms of profit, multiplied by a set profit multiplier. For example, if your company earns $100,000 in profit every year, its value is anywhere from $100,000 to $500,000, depending on the profit multiplier.

The profit multiplier is a number that is estimated by the selling prices of comparable businesses, or it is an established number set by the financial presses in your country. A business broker should be able to help you determine what your profit multiplier number should be, and that will give you an idea of how much the company is really worth.

See also: How to Start a Business Without a Business Degree

Note that you need to remember that net profits are ONLY after everyone has been paid, including the owner. Some companies will not pay the owner a salary for the sake of making a profit, but that will reduce the profit margin of the company – thereby decreasing the value of the company. Owners can earn a salary below market-rate, but their salary must be deducted from the profit margin in order for the company to actually be turning a profit.

If you need help to value a business, it’s worth hiring a business broker. You may end up paying a broker’s fee, but it will be worth it to have someone walk you through the steps of valuing the business you are trying to either buy or sell.

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