How Do You Calculate the Value of a Business?

How Do You Calculate the Value of a Business?

As a business owner, it’s important to keep on top of the value of your business. Whether you’re looking to identify ways to improve its value, are thinking about selling your business, or simply want to know what your sweat equity has built, knowing the value of your business will provide valuable insight. At Transworld Business Advisors, our business valuation experts can help you determine the value of your business or a pricing strategy if you’re ready to sell. 

 

So the question remains, “How do you calculate the value of a business?” Business valuation is best left to professional business brokers because it is more of an art than a science that is dependant on factors like the industry, economy, and the company’s characteristics. In mergers & acquisitions, we rely on the fair market value of a business, or the price a willing buyer would pay a willing seller on the open market for their business. There is also the intrinsic value of a business which is based on stock values (for investors) and the fair value which meets legal standards for situations like divorce. Only the fair market value is a good indicator of what a business can trade for, however.

 

The fair market value of a company can be determined as a multiple of past earnings. This leaves us with the question, what is a multiple and what value do we apply it? Typically, small businesses trade at a multiple between 1-3 and is determined based on the size, quality, industry, and verifiability that it will continue to produce at the same level or more than it is now. If a business is in a difficult industry, has negative growth, and poor books and records, it will trade closer to a 1. If the business is in a growing industry, has carefully tracked books and records, and it is run absentee with a manager in place, it may trade for a multiple of 2-3.

 

Once the multiple is identified, it is multiplied by the owner’s benefit. Owner’s benefit or seller’s discretionary earnings is equal to net income, plus depreciation, interest, the owner’s salary and any fringe benefits they’ve taken. The main point to keep in mind when calculating the value of a company is a business is ultimately only worth what a buyer is willing to pay for it. To learn more about the value of your business, we invite you to schedule a free consultation with one of our brokers, or visit our website for more information.

 

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Rachael Holstein has been the Marketing Manager for Transworld - Rocky Mountain since 2016. Her work experience has been largely focused on business development and marketing in business brokerage, finance, architecture, property management, and information technology. A long time resident of Cleveland, Ohio, she attained her undergrad from John Carroll University and her Master’s Degree from Cleveland State University. In 2013, she relocated to Denver with her husband, Joe, and her furry companions to explore the mile high lifestyle!

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