The worth of a business is not as easy as 1+1=2. Yes, there is still a formula but it takes into account many factors. In the same way that a business is complicated and layered, finding its worth takes many steps and complex calculations. There is one important thing to note: there is not only one “right” way to find what a business is worth, but business valuations can also be done in several ways.
1) A business is worth the value of its assets. True and that is one way to look at things. One can take a look at what the business owns, from equipment and inventory to land and a building. Anything that can be inherited by a new buyer and not built from scratch definitely ties into what that business is worth.
2) Revenue is also a means of determining what a business is worth. Likely, the first one to come to mind, this version is a little less stable. For one, a business is worth the profit already made, but also its projected growth. A new buyer will not want to invest in a business that has already peaked – they will be interested in the business’s growth potential once they are in the owner’s seat.
Warren Buffet uses “cash-flow analysis” as a means to find a business’s worth. This method measures how much cash a business generates each year. That is, the amount of money left once operational costs are subtracted from profits. This method makes sense because revenue is not enough to determine if a business is breaking even or even really profiting at the end of each quarter. It’s just not that simple.