Quick & Efficient Business Valuation Techniques Every Entrepreneur Should Know

business valuation

The language of business is largely couched in advertising, which makes it easier for a business owner to inflate the worth of her business when trying to sell it. Successful entrepreneurs, however, do not rely on advertising, and instead turn to tried-and-true business valuation methods to assess true worth. When employed correctly, these robustly revealing methods detail the worth of the company now, as well as give future projections.

Additionally, there isn’t always time to take a full assessment of a business, the way stock brokers do with technical and fundamental analysis of the trading company. The busy entrepreneur is often faced with thousands of potentially interesting acquisitions, so quick-but-accurate methods are favored from complete analyses. With that in mind, the following are expedient business valuation methods.

Annual Profits and Losses

Taking an account of the annual profits and losses of a business is the first step in an effective business-assessment method. Using industry-standard metrics for valuation – these vary for services like retail, manufacturing, etc – then leads to a multiple of the seller’s adjusted net cash flow.

This multiple is the important number for determining a reasonable value of the company’s projected worth, based on its current financial health. In every region, there are business brokers with expert knowledge on market sales within particular sectors, as well as a time-honored reference called the Business Reference Guild (author Tom West) (source: http://www.fastbusinessvaluations.com/articles/common_quick_biz_valuation_methods.html).

The Earnings-based Valuation Method

This method generally appeals to the more pessimistic speculator. The earnings-based valuation method is officially known as the Earnings Power Value, or EPV. It protects the entrepreneur against losing her original investment, at the cost, perhaps, of better future profits.

Most of the EPVs power comes from the conservative nature of the forecast and, as such, it is one of the more accurate assessments of a business’s current worth. Using multiple figures, it provides the entrepreneur with the actual cash flow inside a company. A few tweaks later produces the earnings, which is then divided by the company’s projected interest rate (when borrowing money) to yield the EPV.

The Multiples Method

This next method helps to better distinguish between company size and earnings. After all, a large company can be considerably more successful than a smaller company, even if the bigger one has more debts and liabilities. The Multiples Method takes market capitalization into account to produce a standardized price-to-earnings ratio making valuation assessments across different-sized companies. (Source: http://www.sunbeltbayarea.net/business-valuations/)

There are generally three kinds of Multiples Methods: the Earnings Before Interest Taxes Depreciation and Amortization (EBITDA), the Earnings Multiples and the afore-mentioned Price-to-Earnings Multiples. With these metrics, the entrepreneur can tie the annual income to what’s “expected” for a business with the relevant market cap.

Liquidation Valuation

This is the business valuation equivalent of a garage sale. It’s a determination of the worth of a business’ physical assets; sans the paying off of debt and other responsibilities. For the entrepreneur, it is a very quick and “hard” judgment, but it doesn’t do much for determining future potential earnings, and other important metrics tied to the businesses potential for success. The essential take-away, though, is that the above methods offer the entrepreneur expedience over accuracy and breadth. It can be a good trade-off when evaluating many companies, until the options are whittled down to a handful – then, methods with greater scope are best applied.

About Mohit Tater

Mohit is the co-founder and editor of Entrepreneurship Life, a place where entrepreneurs, start-ups, and business owners can find wide ranging information, advice, resources, and tools for starting, running, and growing their businesses.

Comments

  1. Rhea Scott says

    What to Consider When Valuing a Business for Acquisition?

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