Young Upstarts

All about entrepreneurship, intrapreneurship, ideas, innovation, and small business.

How To Evaluate Your Company’s Value

When you have started a company and built it from the ground up, it can sometimes be hard to value it objectively. To you, the business is everything, an emblem of all of those lingering doubts and 14-hour days on your journey to profitability.

However, to the market of potential buyers, your business likely has a much more tangible price point. To help you navigate this gap and come to a realistic figure on what your company is worth, there are a number of different steps you can take and numbers to crunch to arrive at fair market value.

Figure Out the Net Assets of the Business.

This is a very introductory place to start, but if your company owns the building, machinery, inventory, and/or technology in which it uses to operate, there is often significant value in this in and of itself.

Once you have tallied all existing assets, subtract liabilities to come to a determination of the company’s net assets. Liabilities are anything that the company owes, often coming with the word “payable,” and may include items such debt owed to creditors and salaries due to employees.

While this “balance sheet” valuation of your company overlooks important value factors such as revenue and earnings potential, it is a good place to start in determining the actual material value of physical property.

Look at Revenues.

This is a very important component in valuing your business, as buyers are going to be interested in how much revenue they can expect to generate on a yearly basis. 

Use previous years’ revenue figures to get an idea of how much revenue your business is likely to generate in the coming fiscal year. From there, consult with a business broker to get an idea of what companies in the sector are typically valued at for given revenue levels.

Another way to do this would be to look at price/earnings (P/E) data. Typical P/E data is readily available for companies in generally every sector of the economy. If your company earns $250,000 per year and is an industry that has a standard P/E ratio of 10, then your company is likely worth about $2,500,000.

Consider Intangible Factors.

Sometimes, figuring out the value of a company’s assets and crunching hypothetical numbers does not tell the whole story of what a business is worth.

For example, a company with an ugly balance sheet and modest revenues in an up-and-coming industry, such as telemedicine, will have significantly more unquantifiable value than a company with tremendous assets and large revenues in a declining industry, such as internal combustion engines.

Also, be alert to larger companies that may be trying to buy you out. If your company is worth only $2.5 million, but you know that the acquisition will lead to synergies of $10+ million in the larger company’s infrastructure, then find a way to capture some of this difference into your valuation estimate.

Skip the Guesswork – Use the Tools.

While figuring out your company’s value can be quite the tasks, there is software available, such as the business valuation calculator provided by Raincatcher, that streamlines the valuation process and gives you a realistic idea of your business’ worth in a matter of seconds, if you have the appropriate data ready.

Using variations of the data listed above, the Raincatcher calculator goes as far to help quantify the intangible factors by looking at future growth of an industry and potential marketability concerns, helping you figure out the real value of your company, above and beyond what the hard numbers may say.

Conclusion.

Evaluating a business’ worth can be a difficult process, with a significant gap likely to exist between the owner and potential buyers. However, by using hard financial data combined with contemporary software to see just how strong a current company’s prospects may be in the future, a fair market value for your business can be reached. 

Share

Young Upstarts is a business and technology blog that champions new ideas, innovation and entrepreneurship. It focuses on highlighting young people and small businesses, celebrating their vision and role in changing the world with their ideas, products and services.

Tagged as: ,