Ever wondered, “How much is my business worth?”
Well, you’re not alone. Whether you’re simply curious or thinking about selling your business, it’s a question that can leave even the most seasoned entrepreneurs scratching their heads.
But don’t worry! We’ve got your back. Here’s a breakdown of three common valuation methods to help you understand your business’s worth.
1. Book Value
Imagine your business as a house. The value of the house (assets) is equal to the mortgage (liabilities) plus the equity you’ve built up.
So, the Book Value of your business is the value of your assets (cash, receivables, equipment) minus your liabilities (loans, credit cards). The money left over belongs to you, the owner, and is called equity (yes, just like in a house).
It’s a simple method to determine your business’s worth, but it doesn’t account for important factors like profitability and intangible assets that may not be well-reflected in financial statements.
2. Discounted Cash Flows
This method is like having a crystal ball to predict your business’s future cash flows.
First, you’ll need a discount rate, which should include the buyer’s cost of capital and the opportunity cost of using their money for your business instead of something else.
Then, you’ll need to project your future cash flows by considering whether your business is growing or declining. Aim for at least a three to five-year projection to get a clearer picture of your current value.
This method considers the buyer’s opportunity cost and indirectly references your business’s profitability by building off cash flows. But it ignores your business’s assets, which might be unfair to you if they’re significant.
3. EBITDA x Multiplier
Profitability is key!
EBITDA (Earnings Before Interest, Depreciation, Taxes, and Amortization) is your profit before unusual accounting entries. It’s pretty close to your Operating Profit.
Applying an industry-specific multiple to your EBITDA gives you an accurate picture of your business’s value. For example, while the Advertising industry may use a 12X multiple, a Publishing company may only be at 10X. The multiplier significantly impacts the ending valuation.
So, how much is your business worth?
In one sense, whatever someone is willing to pay for it! (But having some valuation models will definitely help start the conversation.)
Usually, the folks who help figure out how much a company is worth use a mix of different ways to do it. They kind of mash them all together and give each one a bit of weight depending on how important it is. This lets you get the good bits from each method while making up for any shortcomings they might have.
Still have questions, don’t worry we’re here to help! At Revel CPA, we believe in arming you with the knowledge and tools you need to rock your finances with confidence. For more information and to get in touch with a live human, click here.