Get your company’s valuation in four easy steps

get a valuation for your company

Building a startup is a lot of work. From an idea to finding a location for your business, there’s a long checklist to cross off. When you’re ready for investors to take a look and help you, it’s time to evaluate your company. But investors aren’t the only reason your company needs valuation. Actually, it can be for a number of reasons such as:

  • Business is for sale
  • Do you want to sell shares
  • Do you need a bank loan
  • To understand your company, you want to be valued.

What is an assessment?

Valuation is also known as company/business valuation. This is a process in which a company is asked for all of its economic value along with its assets. The process requires that all business factors are analyzed for the most accurate and accurate reading of the data.

How do you rate the business?

Company valuation actually has several different methods to achieve its goals. There are two methods that are used most often. They are known as the method of multipliers. Also known as the comp. Another valuation method is the discounted cash flow (DCF) method. DCF is a more complicated way, while the comp method is much simpler. For simplicity, consider the comp.

However, it is stated that you should at least try both methods. For the offset method, you need to find a multiple of your EBITDA (earnings before interest, taxes, depreciation and amortization) at the time of the sale. Then you multiply it by your current EBITDA or by your income.

As for DCF, you just need your forecast of the company’s earnings (about five years) and then calculate the current net worth.

Multiple method

Step 1: Don’t value capital assets

Now you are not a magician of the financial world, you are a business leader. You may or may not know it, but the value of an asset is different from the value of a business. These are two separate factors of your business. But don’t worry, this is a common mistake.

For example, let’s say your business is worth $900,000 in supplies, finance, office space, and other parts. If you sold it all, then the business is worth exactly as much as you get if you sell it.

But remember, the value of your company doesn’t matter. What matters is the amount of money that is relevant to your business. Investors and shareholders will not be interested in how much they can earn from the sale of your company. Rather, they want to know how much they can potentially earn from the services you provide there.

Step 2: Understanding profitability based on valuation

So, now you know that the value of a business is not determined by its assets, but by its profits.

Valuing your company is all about understanding how much money you are currently making and how much money you will be making in the future. Buyers need to know how much money they will make if the company falls into their hands.

Some of the factors that need to be understood for evaluation include:

  • Your salary
  • Base salary
  • Net profit
  • Tax
  • Outgoing payments

Apart from this, the valuation also requires two other factors: multiples and profitability adjustments.

Multipliers refer to the ratio of a single business metric to a calculated value. Public companies sell the value of the business. The multipliers can range from 2 to 10 and it depends on the size of the company and the risk factor. Huge corporations are able to know their longevity for decades and even centuries! Smaller companies are in the 2-10 range and that’s about the average. You then multiply your profit by whatever factor makes sense for your business.

Profitability adjustment occurs when a company does not earn the same profit consistently. Once you have a valuation of your business, you need to detect gains and losses when you apply it to multiples. You have to look at three things:

  • Competitor progress
  • Expected market growth (your own)
  • Financial data of your company

Be sure to keep all your notes, otherwise the assessment will become more difficult. When all the data is available, you have answers in a day or more.

Step 3: Cost Calculation

The good news is that if you are organized with your documents and data, this won’t take long at all. If you are in financial transactions, this may take up to several months.

First, you need to know your business’s gross profit and subtract expenses. Next, you need to figure out your multiplier. The smaller the business, the lower the expected rate of return. Some of them require guesswork and there is no established way to do this. Instead, you need to ask a few questions.

  • Explore the industry
  • How healthy is your financial history?
  • Is it stable enough for top multipliers?
  • What will be the fate of your business when you leave it?
  • Do you have a guaranteed income for many years?
  • How big is your customer base?
  • What is your relationship with suppliers?

To better understand multiplicity, check out these tips:

  • One person’s business will not sell for a multiple of three.
  • Income up to $500,000 usually tops out at five times.
  • Those with over $500,000 are expected to go into double digits.

Increase the value of potential growth for the company. For this you need:

  • Company Growth History
  • Market growth (your own)

Next, you need to deal with the market. It requires:

  • If you are in a stable market, it is recommended that you use your historical numbers.
  • If you are new to the market, then you have the opportunity to grow.

For the next step, you need to know the potential growth rate of the market. To do this, you compare the market rate when you first started with the market rate for your business today.

Finally, add height. Use your historical data to find the company’s growth over the next few years. Just add 10% to your profits. Multiply by increments instead of adding it to your current shape.

Step 4: Market Value Calculation

Now you have an estimate. Now show it to buyers, investors and more! But no matter how hard you try, the market will decide your fate.

Market value is often the most reliable way to obtain appraised value. When you meet with buyers, you can tell them your appraisal number and how far you can go with that money. From there, investors will either accept it or not.

If you are unable to receive the full amount from your buyers, this is not an approved value. If investors don’t think your business is worth what you’re talking about, there’s a good chance they’re right.

Conclusion

While you may have to compromise, so be it. A business only has a job when there is a market demand for it. Sometimes factors like supply issues or larger events like the coronavirus can make your business more important than others. Thus, it can result in more or less value for your business.

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