Determining the Value of a Business
There are many reasons that someone might want to find out the total value of a business, and there is a lot that goes into that calculation. If you own a business and are interested in selling, knowing the true value can help you determine an appropriate asking price. If you are looking to take your company public and sell off shares as stock, the value of your business can determine how many shares you should offer initially as well as what the going rate will be. Regardless of why you are interested in determining the value of a business, there is a very calculated way to do it that will give you a very accurate representation of what it actually translates to on paper.
Income and Expenses
The first part of the equation is to figure out the total amount of income and liabilities your company has on average. Basically, you just add up all your sales and account receivables to determine how much income your business has. You can then figure out all of the business expenses including payroll, leases, and utilities to figure out how much money the company is liable for in a given period of time. The difference between the total income and expenses for your business in the same period of time is the profit which will play a significant role in determining the total value of the company.
The next piece of the puzzle is figuring out the total value of all the businesses assets. The assets include everything the business owns including company cars, merchandise, and even the staplers that sit on your office desks. So, for instance, if you run a wedding supply company, you would count the value of things such as the wedding sparklers and napkins you sell to your customers as well as all of your packaging supplies and the shelving where you store them. There are several inventory tools that can help you figure out the total counts of your assets as well as their total value. Usually, you will assign a person to be in charge of each area of the company so that you can itemize the different types of assets you own in case you want to sell only parts of the business. Don’t forget that any cash on hand in your company accounts count as assets, but any loans that you have out will actually count against your value.
Projected growth is a very important part of figuring out the value of a company, but it is also the trickiest to get right and is subject to a lot of scrutiny. The best way to have a solid basis for projected growth is to get long-term contracts with your current clients. You can then base you assessment on the continued rate of business with your existing customers in addition to the new contract that you are signing to determine how much growth your business will see over the upcoming years. Typically, businesses that are expected to grow in the near future are a more attractive option than a company that has already peaked out its growth options.
Depending on what type of business you happen to own, there may be a few other factors that weigh into your overall value that are industry-specific. The factors that were discussed above are not the only ones that matter, but these are the ones that are generally accepted regardless of what type of business you happen to operate.