How to Determine What You’re Worth: A Guide to Business Valuation

If you own a business, understanding its value is important for a number of key reasons. Having figures for overall value provides insight into the company’s financial health, and it helps you understand where you stand amongst your competitors and within the general market. 

That said, the process of business valuation can be tough to get your head around given how many moving parts are at play. To help you get started, this article will walk you through the first steps.

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On Business Brokers

Business brokers are the professionals to turn to when you need a valuation for your business. They’re there to help you break down the figures into manageable segments and use their extensive knowledge to offer you the best estimate. Importantly, they have a deep understanding of the market and how it fluctuates, and combine this expertise with detailed data analysis for a far more comprehensive answer than you could hope to reach on your own. 

As you’ll learn below, there are many different methods for evaluating a business’s worth, and a good broker will select the most appropriate solutions for your individual case. 

Understanding the Different Methods of Business Valuation

As the old saying goes, there’s more than one way to skin a cat, and when it comes to business valuation, there are several different methods to investigate:

The Income Approach

One of the simplest ways of valuing your business is the income approach. This method takes into account your current and future earning potential to estimate value based on supposed profitability. 

The Market Approach

This method looks at the market overall, comparing your business to similar companies that have recently sold to reach an estimated value. 

The Asset-Based Approach

The asset-based approach totals all your assets and then subtracts liabilities (money owed) to determine a total net worth. 

Usually, it’s best to use a combination of the above methods to reach an ideal figure, as each has its strengths and weaknesses and none are water-tight on their own. 

Factors That Affect the Overall Evaluation

It’s important to understand that ‘value’ isn’t black and white. While the above methods all ultimately revolve around worth in a monetary sense, there are several other factors that go into determining the final estimate. 

It’s true that overall profitability will always be top of the list but, as the income approach takes into consideration, it’s also important to predict where a business is heading in the future; growth now doesn’t necessarily equate to growth later on, and vice-versa.

Operational efficiency and how your business is structured will also be taken into account (your management structure will likely be scrutinized, for example), and having glowing customer reports also go in your favor for higher value. 

Wrapping Up

Hopefully, you’re now up to speed on the core principles behind business valuation. Even if you’re not looking to sell right now, it’s always a good idea to get the lay of the land and gain greater insights for the future.