How to Value a Company in 5 Easy Steps
There is absolutely no doubt that every business owner will think about selling their business at one point in time. Naturally, this doesn’t mean that this is going to happen, but it certainly crosses their minds. Of course, this is not an easy thing to do since owners have invested a lot of their time, resources, and energy in their companies.
Plus, there’s the question of sentimentality. Different from what many people think about this process, selling your business to some other party can be a pretty difficult thing to do, not just for these reasons. In some cases, it could be a really big problem to understand the proper value of a certain business. It’s needless to say that every owner would like to receive as much money as is possible for the business they have created.
But, to do that, you will need to value it properly. Once again, we would like to say that this process is a much more complex thing than it meets the eye. Therefore, we would like to provide you, our reader, with some steps you can actually get a proper value of the organization in question. Let’s get a look at these.
Step #1: Preparation
As is the case with running an effective organization, the valuation process requires strict planning. Not only that, paying attention to details is an absolute must. There are two main starting points from which you can understand what’s important for the evaluation of a certain business’s worth. The first one is knowing why you need to start this process, and the second one is that you assemble all the crucial information.
It can be said that many people are surprised with the fact how big of an influence their valuation needs can be on the results of the process. Anyway, the preparation, which is the first step in evaluating your company, is an essential one. Therefore, you will need to be pretty careful about what you come up with in this one. You can think about it as some kind of foundation for the whole process.
Step #2: Past Monetary Statements
The best way to describe company’s valuation is to say that we are talking about a financial analysis exercise. Naturally, the previous works of the company, mainly past monetary reports, are crucial for coming up with the proper evaluation of the company’s price. When talking about the two most important statements, we are pointing out the balance sheet and income statement. To do it properly, you will need to go three to five years in the past to have a proper evaluation.
Now, we would like to point out one grave mistake small business owners make. They are often encouraged to decrease taxable income. However, when they need to sell their company and perform this kind of process, there are potential problems since it is crucial to have a full potential of a business in front of you. Besides, it needs to be said that all the following assets, like property, need to be listed as well. I
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Step #3: Choosing Between Methods
After you’ve obtained all the most important information, it is time to choose the method that will be used in this procedure. Since there are so many of them, it wouldn’t hurt anyone to make a combination of several of them. That way, you will be able to get the best possible results. All the methods in front of you more or less fall into one of these three categories:
- Asset approach
- Income approach
- Market approach
Furthermore, it needs to be said that choosing a set of methods will depend on a couple of factors. Here are some of them you should consider. We are talking about things like business earning history, capital costs, knowing the business’s asset base, comparative business sale data, and incomes projections. Since there are so many different factors, it needs to be said that you will need a team that will commit itself to work towards establishing these.
Step #4: Applying the Approaches
Now that you have decided upon the methods you will use and all the information you need is collected, it is time to start applying these methods. As we’ve mentioned, it would be a good choice for you to combine different methods so you can cross-check all the information. Let’s say that one particular method can provide us with some solid results, we can use another one to try and check these numbers by it.
At the same time, you can see if something has been overlooked in the process. With that said, it needs to be pointed out that there is a lot of business valuation software that can provide you with the best possible picture about what you can expect from your business, in terms of value. Some of them are pretty good and can provide you with really good results. However, you will need to research before you can come across the best one of these.
Step #5: Reaching the Conclusion
Finally, you’ve got through all the steps above, and now you have a proper picture of what’s your company’s worth. We would like to say that looking just from one perspective will not provide you with a complete image. Therefore, you will need to consult a couple of different methods.
Surely, what are the methods you will use is completely up to you, if you know what are you doing, of course. By performing a successful procedure, you will know how much money you can depend on in case you opt for selling your company, which is surely a good thing to know, right?
Knowing what’s your company’s worth is a pretty important piece of information, regardless of your decision to sell it or no. Therefore, we’ve provided you with a couple of steps that can guide you through the whole procedure. We hope you’ll find these steps useful and that they will help you on your journey.