What is your business really worth? When attempting to buy a business or sell one of your own it’s vital to know the monetary value of the company. Such a financial valuation will also allow a business owner to discover how much their business is worth in today’s market in order to determine personal financial worth. Such information is valuable when obtaining loans from financial institutions for expansion of a business or buying another company.
Determining how much your business is worth can be a lengthy process, but not necessarily a difficult one. However, you will need good financial records. If you are investigating a business to purchase and the financial records are not in good shape, be aware that you can’t accurately determine the real value of that business without dependable information and misrepresentation can easily enter the picture. Not having clear financial records can also cause problems when attempting to obtain financing for the purchase as well as the buyer paying more money than the business is worth.
You should first determine all of the company’s assets, then the monetary value of those assets. You should include the cash value of all items the company owns loan-free, such as the inventory, buildings, furnishings, manufacturing equipment, and company vehicles. You should also include any specialty artwork such as logos or trademarks that will be sold with the business and become the property of the next owner.
The annual earnings of your company, or the net income, will need to be calculated in a cash flow analysis. Do not deduct taxes or depreciation from this amount. If you take a salary from the business or if your company pays any of your personal expenses, such as a company car or cell phone bills, do not deduct these expenses from the company’s net income.
The amount of the revenue stream will not reveal the worth of the business because you must also determine how much of that money is profit. The company assets and annual earnings will be compared to the amount of money owed by the company, such as any outstanding loans and cost of operating the business to determine the profit margin.
Many outside factors can affect the overall value of a business. Economic conditions such as a recession, fluctuating market prices either up or down, or changes in demand for the product or service can all contribute in a positive or negative way concerning the value of your business. When selling a business it is best to sell when the economy is doing well and prices are rising to obtain the best price. However, some people buy companies during economic downswings so they can be purchased at a reduced price and restored to good financial shape in the future.
An accurate valuation will help not only to sell your business, but in the purchase of a business it will help to protect the buyer by revealing any weak spots in the company. Hiring a professional to do the business valuation of your company is another option, eliminating any guesswork.