Tips for getting an accurate understanding your company’s value so you can develop a realistic valuation of your business
Billionaire investor Warren Buffett once gave a business school commencement speech about how business valuation is the most important aspect of running a company.
Mr. Buffett is about as right as he is rich.
The value of a company can be achieved using these three approaches:
- comparing recent sales of similar businesses
- taking a look at the company’s earning power and risk assessment
- how the business is doing in terms of assets and finances
Not only does understanding the worth of your business give you a way to measure your company’s profits, achievements, losses, and what it actually will sell for, it will also help prevent company shutdowns. By not knowing how a business is doing, underlying problems can strike at anytime and lead to bankruptcy.
Since 1991, more than 50,000 gas stations have been completely shutdown and abandoned thanks to the popularity of Walmart and Costco. Something like that is difficult for small businesses to prepare for, but knowing the actual value of your company ahead of time can at least put you in an advantageous position.
Here are a few tips for getting the most accurate look at your company’s value.
Examine all other translations that have occurred in your industry
It’s important to stay on top of the business sector news at all times, but especially when you’re attempting to get an accurate business valuation.
If a business in your field sells for $1 million and was roughly four times larger than your small business, you can get a solid valuation based on that. Obviously, there are other factors that go into business valuation, so it’s important to implement as many as these tips as you can.
“If you’re doing $100,000 in revenue this year and earning $10,000 in cash flow on that, and next year you think you’re going to triple to $300,000, your cash flow will increase proportionally to $30,000,” said Nathan Beckord,” principal of consultancy VentureArchetypes. “You can do that math and then convert it into a present value.”
Take a look at nonfinancials
Non-valued items can actually impact your business’ valuation. Take a look at owner and employee expenses, taken pools, revenue streams, and the entire day-to-day operations to get a better idea of your company’s worth.
“All of these types of nonfinancial terms can still have a financial impact on the valuation,” added Michael Litt, CEO and co-founder of Kitchener. “We took what we felt the average cease and desist would cost a company in the event they tried to mimic us, then assigned a value to that and added it in.”
Be as realistic as possible
It’s a universal truth that all entrepreneurs and CEOs believe their companies are worth much more than they actually are. Try your best to fight those optimistic feelings and take a realistic look at every aspect of your business.
As long as you’re being honest with yourself and your organization’s members, you should find the real value and can take your next step from there.
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