How to Determine the Value of Your Business – When you’re ready to sell your business, one of the most important things you’ll have to do is determine its value. This can be more difficult than it seems because there are many factors that go into pricing a business rather than just its bottom line financial results. This guide will help you understand How To Value A Business and what factors will affect its value.
Revenue
If you’re starting a business, it’s important to get an idea of how much money it can make. To start, look at your main competitors and think about what their customers are willing to pay for their products. Then, consider how many customers you could potentially attract with a little extra effort and thought. If your product or service is unique, try doing some research on how others in similar industries have been valued in recent years—you may find that you should expect less revenue out of the gate than you’d expect if your company were completely new. Once you know how much money you might realistically bring in each year, multiply that number by your discount rate to arrive at a valuation. (See below.)
Liabilities
The main difference between a corporation and an LLC is that a corporation can have debts and obligations or liabilities. Liability is the money you owe others for services performed, goods purchased or other financial transactions. When determining how much your business is worth, you need to look at assets (the value of what you own) and then subtract liabilities (the money owed). For example, if your business owns property valued at $20,000 but owes someone $5,000 on the loan used to purchase it, its assets are $15,000, and its liabilities are also $15,000. The balance sheet shows that your net worth as a company is zero: no more assets than liabilities.
Assets
First, figure out what you’re working with. Look at everything you own and determine whether it’s an asset or a liability. In other words, is it bringing in money, or is it costing you money? Some assets are more obvious than others—think real estate, patents and copyrights, machinery, vehicles and so on. But there are many assets that are either hidden or difficult to pinpoint as an actual financial value. These include human capital (an employee), goodwill (good reputation) and intellectual property (trademarks). There’s no rule about how much each of these should be worth; for example, your employee might be incredibly valuable, but she might not be replaceable if she leaves.
Management
Unless you’re a solopreneur, you will need to delegate. Though it can be a bit scary at first, it’s an essential part of growing your business. If you try to do everything yourself, you’ll either end up burning out or being very unhappy with your choice in delegating. Before you do anything else, put together a management plan that outlines what each manager is responsible for and how frequently they need to check in on their responsibilities. With so many moving parts in any business, having clear rules is key—and managers are less likely to step on each other’s toes if they know exactly what their role is and when it needs attention. All of this will help you to get to know better about How To Value A Business.
