A version of this article first appeared on EideBailly.com.

A business valuation is an independent assessment that determines your company’s worth. This is typically based on expected cash flow and transactions of similar companies if they exist.

While you may have an idea of your business’s worth, a third-party appraisal provides an objective value and outlines steps to prepare for future growth or exit.

Factors that Influence Business Valuation

A comprehensive business valuation examines financial structure, funding mechanisms, and contractual agreements that shape your organization’s value and dynamics.

Key considerations include:

• Share Purchase Funding
• Share Buyer Identity
• Life Insurance Coverage
• Alternative Financial Resources
• Loan Agreement Restrictions

Understanding these factors provides a more complete picture of your business’s value and potential, helping inform decisions about its future.

Ways to Value a Business

• Market Capitalization: You calculate this by multiplying the total number of outstanding shares by the current market price of one share. This gives you a quick snapshot of your company’s market value, reflecting investor sentiment and current market conditions.
• Times Revenue Method: The Times Revenue Method focuses on your company’s revenue generation. You multiply your annual revenue by an industry-specific multiplier to get an estimated value. This is especially useful if you have a newer business with limited earnings, as it provides insight into your company’s future potential based on its revenue.
• Earnings Multiplier: With the Earnings Multiplier method, you evaluate your company’s earnings, typically before interest and taxes, and multiply it by a set factor. This factor varies depending on your growth potential, profitability, and industry trends. This method gives you a clearer view of your company’s profitability and growth potential.
• Discounted Cash Flow (DCF) Method: The DCF analysis helps you project your future cash flows and discounts them to the present, accounting for the time value of money. This is one of the most comprehensive business valuation methods because it considers your future earnings and cash flow projections.
• Book Value: The Book Value method assesses your company based on your balance sheet by subtracting your total liabilities from your total assets. Valuing a business this way gives you a tangible view of your company’s worth but often misses intangible assets like your brand reputation or intellectual property.
• Liquidation Value: Liquidation value considers what your company’s physical assets would be worth if you were to go out of business. This method excludes your intangible assets and focuses solely on what you could recover from a quick sale of your tangible assets.

Make Sense of Your Business’s Value

Understanding your business’s worth isn’t just about putting a price tag on it. It’s about empowering you to make smart decisions, whether you’re preparing for unexpected events or planning a smooth ownership transition.

By getting a handle on your business value early, you can set yourself up to tackle challenges head-on and seize growth opportunities when they arise.