“What is my business worth?”
If you’re considering selling your company, you know how this question can haunt you. Valuing a company is vital for a successful sale and gaining further outside investment. But how exactly does one go about valuing a company? The process of acquiring a valuation for an organization differs depending on whether the company is private or publicly traded. Knowing how to value a company is an essential skill because it allows business owners to cut through the noise and deal in hard numbers. Unfortunately, there isn’t an easy answer because there is no single technique for valuing a company. There are several business valuation methods that apply to various scenarios.
You initially need to begin with your company’s designation. Valuing a publicly-traded company is simpler than doing so for a private company. Valuing a publicly-traded company is more straightforward because all you need to do is take its stock price and multiply it by the number of outstanding shares. Public companies have much stricter accounting standards, and their financials are readily available.
On the other hand, privately-owned companies are in the hands of a select few shareholders. Transparency is lower, making it much more difficult to ascertain the actual value of that organization. While it’s not impossible to apply accurate business valuation methods to a private company, it often requires enlisting the help of a professional valuation expert who knows how to valuate a company.
Depending on the valuation professional and the company they are tasked with valuing different valuation methods may be employed. The key skill when it comes to how to value a business is to employ the correct methodology at the right moment.
The comparable analysis method goes by many names, including trading multiples, equity comps, peer group analysis, and public market multiples. All these names pertain to the same method of valuing a business.
This method involves comparing the current value of an organization to other similar businesses by looking at ratios like P/E and EV/EBITDA. EBITA multiples are the most commonly used ratio when using this method.
The value in this method of how to determine the value of a business is that it’s relatively simple to utilize and has the advantage of being current.
Precedent transactions are another type of relative valuation. Compare a company to other businesses that have been sold within the same industry. It is a method for how to valuate a business for sale, but it gives entrepreneurs an idea of how much they would expect to earn if they sold today.
While precedent transactions are great for uncovering the en bloc value of a company, they can quickly become dated. This technique is less common than trading multiples.
DCF analysis utilizes the intrinsic value approach to figure out the dollar value of a business. So, how do you value a company using this method?
Analysts will forecast a business’s future returns by looking into its unlevered free cash flow. They will then discount it back to the present day using the firm’s Weighted Average Cost of Capital (WACC).
These models require extensive analysis and are among the most complex methods for how to value a company. It is by far the most detailed of these approaches, and building the model quite often mostly takes place within Excel.
Most commonly, the DCF value will be used with larger businesses with multiple arms. It is largely considered to be unnecessarily complex and detailed for smaller organizations.
Business valuation calculators can give you a basic idea of how much a company is worth by using the company’s current finances. So if you’re asking “How much is my business worth?”, these calculators can provide a ballpark figure. However, keep in mind that these calculators only provide estimates and it’s always best to leave selling your life’s work — your business — in the hands of a professional. You should also keep in mind that when looking for investment or putting a business up for sale, many third-party investors will demand a formal valuation.
The benefits of using these calculators are simple. It saves time because all that business owners need to do is plug in a few figures from their finances.
Knowing how to value a small business is complex and no online tool is an adequate substitute for an experienced professional who can analyze a business’s true value. For help with how to value a company and to learn more about business valuations in the Chicagoland area, contact Porte Brown today.
Get in touch today and find out how we can help you meet your objectives.