If you have wondered how to estimate the value of a company, there is a formula that can help. Similar to bond or real estate valuations, the value of a business can be expressed as the present value of expected future earnings. Use this calculator to determine the value of your business today based on discounted future cash flows with consideration to “excess compensation” paid to owners, level of risk, and possible adjustments for small size or lack of marketability.
How to Calculate Business Value
Calculating business value is based on a number of factors. You can get a general idea of how much a company is worth by looking at:
- The assets. Consider the inventory, property, machinery, real estate, supplies and other assets a business owns. You can get a sense of this by looking at the balance sheet. Keep in mind how much liability a company has so you can juxtapose this number against their assets.
- The cash flow in the business. If a company makes profits of $60,000 per year, you can evaluate how much you can expect to make from the business every year after you purchase it, which can be a useful way of evaluating part of the business’s value.
- Business standing. This one is harder to quantify, but you can get a sense of how the business is doing by examining its mailing list, customer base and its standing in the community. Is the business well-known? Are there plenty of customers? These answers give you a sense of whether the business is expanding and is healthy.
- Intellectual property. This is also harder to quantify. However, if the business owns assets such as intellectual property, licenses, patents, recipes or other types of intangible property that offer value now or may in the future, they can help when tabulating the business’s value.
- Comparisons. Another way to value a company is to compare it to similar businesses in the same industry and area. In some cases, companies look for the best performing business in an area. However, it can also be useful to look for a lower performing business with potential. You can revitalize it and buy at a discount, but it is important to understand how the business measures up to its competition so you get a fair price for it.
How to Estimate the Value of a Company
Evaluating the value of the business is more of an art than science. Many things can affect the value, including:
- Assets-versus-loans ratio
- Diverse sources of traffic and customers
- New sale drivers
- Stable or growing traffic or customer base
- Established vendors and suppliers with strong contracts
- High percentage of repeat customers and sales
- A strong brand
- No liabilities, such as legal concerns or trademark infringement problems
- A potential for growth
- Low debt-to-profit ratio
- Strong market position
- A strong set of business practices and written processes or systems that allow the buyer to replicate the successes of the company
There are brokers who can help you evaluate how much a venture is worth. Many business owners value their business based on a number of factors, or even their own sense of what the business is worth. Another option for estimating the value of the company is to use our calculator. This free, non-biased calculator can give you a sense of what a business is worth so you can make smart decisions, whether you’re buying or selling.