5 Steps to Understand What Your Business Is Worth

By March 18, 2020Blogs

In today’s fast-paced, constantly evolving world, being a business owner can be tough. You have to worry about profit, marketing, sales, customers, accounting, and more. Whether you’re a solopreneur, or whether you own a company with hundreds of employees, knowing your business’s value Is critical.

Very few business owners out there know what their business is worth. So, they have no idea that it could be their biggest asset. Even if you aren’t looking to sell, knowing your business’s value is a pertinent metric to understanding your company’s performance. If your value is lower than others in your industry, than your performance is likely also hurting.

And here’s the thing, you might think, “I know what my business is worth.” But, over 97% of business owners overestimate their business’s value by 50-200%. So, if you haven’t actually worked on discovering your company’s worth, you could be way off.

Even if you have high revenue and cash flow, your business value could still be lower than you think. In fact, we’ve seen businesses with similar revenue and cash flow be worth 70% less based purely on better performance.

So, what is your business truly worth? Here are five steps to understanding your business’s value.

Step #1: Know Your Assets
The first step to knowing your company’s actual worth is knowing what your cash assets are now. Assets include inventory, equipment, financial backing, cash on hand, and any other asset the company may have. In determining your asset value, you’ll need to get an idea of what the resale values of your items are to identify the actual value of the assets.

Step #2: Know Your Financials
This step is pretty straightforward, but you need to know your company’s revenue, profit, and debts. Things can get tricky here, because sometimes businesses will undervalue their financials for tax purposes and overvalue for sale purposes. Often, this leads to a lot of rectifying in accounting. But, the second step to understanding your company’s worth lies in getting a complete picture of your company’s existing financials.

Step #3: Know What Makes Your Company Valuable
After you know your assets and financial situation, it’s time to understand what makes your company really valuable. Hopefully, your profits look positive. If not, you’ll want to see how you compare to the rest of the industry in terms of profitability and performance. Aside from profitability, your company can have unquantifiable value in things like already-retained talented employees, geographical location, niche products, potential future partnership opportunities, a unique position in the industry, and more. While most buyers will look at profitability first, it’s often these intangibles that make the sale. These factors all go into assessing the market value of your company.

Step #4: Look at Historical Data and Make Projections
Once you know your assets, financials, profitability, and unique value, it’s time to dig into historical data and make projections. Most of the time, you’ll want to look back at the last three to five years to garner an accurate historical picture. Then, you can use this data to project potential value to buyers.

A popular method for projections is the multiples method. It’s a formula for projecting the business’s value to potential buyers over a period of time. If the company profits $100,000 a year, and the price-to-earnings ratio is set at ten years, then the company’s value might be $1,000,000 over the next ten years. There are several other methods for valuation and projection, like the discounted cash-flow-analysis.

Ultimately, projections are about projecting the business’s value over time. It’s about speculating whether it will make the same amount each year, grow, or decrease in profit over time to determine a historical based projection.

Step #5: Hire a Professional Valuator
The reality is that evaluating a business isn’t cut and dry. There are numerous factors involved to determine your company’s actual worth, and it takes a lot of time and work to do it accurately. Moreover, figuring out things, like your market value, can be incredibly difficult. That’s why many business owners choose to make it easier on themselves by using a business valuation calculator or bringing an expert in to do the heavy lifting. Hiring a professional ensures that you aren’t making any mistakes and that you’re getting a proper valuation.

Figure Out Your Company’s Worth Today

Even if you aren’t looking to sell, knowing how your company stacks up to competitors in your industry can be incredibly valuable. It can help you gain meaningful insight into what your company can do to increase revenue and profitability. If you follow the steps above, you’ll be on your way towards an accurate valuation.

Keep in mind that most business valuation calculators and companies aren’t answering the right questions for business owners. Often, they cut corners and give you information you could easily find on your own. Before now, business valuation wasn’t usually worth the time or money unless you were looking to sell right away, but now we have a free and accurate solution.

So, there’s no better time than the present to get a gauge on your business’s value.

About the Author

Marla DiCarlo is an accomplished business consultant with more than 28 years of professional accounting experience. As co-owner and CEO of Raincatcher, she helps business owners learn how to sell a business so they can get paid the maximum value for their company.