Every business owner must know how to calculate the company’s market value, and in simple terms, it is known as business valuation. Overestimating your business value can be dangerous, and the outcome of underestimating it will be the same.
Knowing your company’s value is essential, no matter how small or large. A reliable business valuation report can help you to make better decisions. Besides, it will be useful in growing your business in the future.
A business valuation provides entrepreneurs with facts and figures about their company’s worth in the competitive market. A business valuation report is crucial as it shows the yearly growth and revenue generation.
Why should you know your business growth? The valuation report contains specific numbers to obtain insurance coverage for the company. Additionally, you can learn how much to reinvest into the company and how much you can sell to generate a profit.
Let’s learn the importance of knowing your business value and the worth of a company with $1 million in the market:
Benefits of Knowing Your Business’s Current Value:
You must know the company’s value before selling it on the open market. The more the business value, the higher the selling price will be. So, as a business owner, you must know what your company’s current value is.
Negotiating with the investor seems easier if you know the company’s resale value. Take help from a valuation firm to calculate the business value if you don’t have adequate knowledge in making balance sheets or statistical figures.
Most entrepreneurs think their business worth is based on the stock market or total asset value. However, this is a misconception that most business owners believe in. A business valuation is more than simply calculating the company’s bank account balance.
Determining the actual value of your company is often decided based on the possibility of selling it. It also helps to show the businesses’ income growth in the past 5 years. Potential investors or buyers will look for another option if your company remains unchanged in the last few years.
Here are the other reasons why you must know your company’s market value:
What if a leading company wants to buy your retail store? A business valuation report will help them show your company’s value as a whole. Besides, you can easily tell them the asset’s value your company currently has or how it has grown over the years.
Entrepreneurs must also share plans or strategies to expand the business to potential buyers. Most companies will try to acquire your business or merge with them for less than $1 million. You can negotiate with the buyer and increase the selling price if you know your business valuation.
Consider rejecting the deal or don’t make further negotiations if the buyers offer less for your company. Look for other buyers who will give you the proper value for your company. Cancel the agreement with the buyer, and don’t settle for less.
Provides Access to More Investors
Investors prefer checking where the business is spending money and how you will return their investment. More investors will show interest in your company if they see that their funds will take the business to the next level.
Moreover, the investors might also increase the money they will provide for your company. It won’t be possible without a business valuation report. So, focus on making this report and add the business expenditures to attract more investors.
How Can You Valuate Your Business?
Most business owners tend to think calculating their company’s value is difficult. Thus, they contact professionals from the valuation firms for the ultimate assistance. However, there are many easy ways to check a business valuation. Different types of valuation formulas are available for businesses to calculate their current value.
Here are the factors you must consider when knowing the valuation of your business:
Total Assets Value
It is estimated by calculating the total value of your business assets to the current owner, buyer or investor.
Liquidation value refers to the company’s worth when the assets are sold. It is the estimated amount received after selling all the assets and repaying the debts.
It is used to determine the maximum price of a company. Business owners must determine how much revenue they will generate at the end of the year based on the current status.
Value of Competitors:
You must check the value of the businesses with high market value before deciding the final selling price. Try to keep the selling price from your competitors after the business valuation.
Intellectual capital is the company’s workers’ training, years of experience, skills and knowledge about the business. It provides every company with a competitive advantage in the market.
Business owners must multiply the company’s income by a specific number to decide its selling price. For instance, if your income from the business is 1 million dollars and you multiply it by 6, the total value will be 6 million dollars.
What is the Ideal Business Valuation Formula?
Financial experts recommend taking 3x of your business’s current value. It means your business valuation will be 7.5 million dollars if your annual revenue is 2.5 million. Remember that this business valuation formula will be useful only for revenue.
There is another business valuation formula software, or technology-based companies can use. You must add $1 million per founder with $1 Million per patent and $1 million per active user to get the total valuation.
Let’s say your company has $2 million for 2 founders, $3 million for 3 patent software and 400,000 active users. So, your business valuation will be $5,4000,000.
What will be the Company’s Value with $1 Million in the Market?
You can use different formulas to value a company worth $1 million in the market. Business owners can use the EBITDA multiples, SDE and Comps method to determine the actual value. When should you use EBITDA? It is an effective method for calculating large businesses’ market value.
On the other hand, SDE helps to check the worth of small businesses with $1 million in sales. The comps method can be used to determine your company’s worth by comparing it with other companies of similar size in the same sector.
You must use industry-specific multiples for the EBITDA and SDE approaches. However, the number you will multiply depends on the industry’s current trends and history.
Let’s say that a business with $1 million in sales generates 150,000 SDE or EBITDA. Suppose the industry-specific multiple is “4”, then the business value will be 150,000 x 4, which is 600,000.
Based on the Comps method, you must find a business with a similar type and size that has been sold recently or is receiving funding. Check its value and try to keep a higher value than that when selling your company. We recommend consulting with a professional if you can’t find a competitor for your business.