Do you know how much your business is worth?

Most people know approximately what their homes are worth simply by keeping an eye on what other homes in their neighborhood are selling for. Determining what your business is worth isn’t quite as easy, but there are many instances when a business valuation is essential. If you’re taking on a partner or selling your business, a valuation will help you set the right price. Valuations are also important for estate and business succession planning.

Adjusted net book value

When valuing your business, start with your company’s most recent balance sheet and income statement. While a balance sheet is a snapshot of your company’s assets and liabilities on a given day, an income statement is a summary of its revenues and expenses over a certain period of time.

The first number to calculate is net book value (NBV), which equals total assets minus total liabilities. While NBV is a good starting point, it usually doesn’t reflect the true value of a business. That’s because your balance sheet lists most of your company’s assets at original cost instead of at current fair market value.

Business valuations generally look at adjusted NBV, which adjusts each asset to current market value or replacement cost.

Income and cash flow

After valuing your business by its balance sheet, look at your income statement. Multiply your company’s net income by the P/E (price to earnings) ratio common to your industry.

Another method, discounted cash flows, values a business based on its projected future cash flows. The future net income of your business is projected and then discounted to arrive at a reasonable present value.

Calculating value

Once you finish your calculations, you’ll notice that the values calculated by each method might vary considerably. The trick is to determine which method, or combination of methods, best represents what your company is worth.

Many variables and risk factors also affect your company’s value. These include (1) how long you’ve been in business, (2) your product line, (3) the depth of current management, (4) whether you rely on a few or many customers, (5) local or national distribution, (6) industry competition, and (7) expected industry growth.

Ultimately, your company is worth whatever someone is willing to pay for it in an arm’s length transaction. The above methods, however, can give you an idea of what to expect. For assistance in valuing a business – yours or someone else’s – give us a call.