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Business valuation: how to value your business

Whether your business is still in its early stages of growth or well-established, a business valuation lets you take stock of all that you’ve accomplished. It’s an important figure for investment purposes and helps with both short and long-term financial planning.

When do you need a business valuation?

It’s a good idea to take stock of your business value every now and then, whether or not you’re looking to sell. A small business valuation might be used to appeal to investors, for example. Here are a few more reasons to consider using a business valuation calculator:

  • Puts a tangible price on your business for selling purposes

  • Sets a fair price for company shares

  • Securing investment for new projects

  • Growing your business in the long-term

  • Gives a picture of financial health

  • Identify areas where you’re underperforming

It’s recommended that businesses perform an annual valuation to keep their figures up to date. Knowing what you’re worth helps you determine where you can allocate funds for improvement or growth.

What factors impact a business valuation?

A business valuation calculator will take several figures into account. Some parts of the business, including tangible assets like property and equipment, are easy to assign numeric value. Intangible assets can be harder to define. Here’s what you should think about when you’re valuing any business:

  • Intangible assets: Intangible assets include your business’s reputation, trademarks, intellectual property, and customer relationships. These might be harder to put a defined value on, but they need to be accounted for.

  • Tangible assets: By contrast, tangible assets are easier to tally up. These include all of the assets you use in the daily operations of your business, like equipment, property, stock, and clients.

  • Financial statements: The first order of business with any large or small business valuation is to get your statements in order. A higher valuation can be the result of well-maintained, balanced books showing all cash flow and profit projections, current debts, and managed costs.

  • Circumstances of the valuation: Is your business going through a forced sale? This could decrease its value in the eyes of investors.

  • Strength of your business’s team: People are what make some businesses more valuable than others. Does your team have a proven track record of success? Do you have experienced, loyal employees who will stay the course? This can all increase value.

Business valuation methods

Financial analysts use an array of business valuation methods in their line of work. Here are a few of the top methods to use when looking at your business’s worth.

Entry valuation method

One way to approach this task is with an entry valuation method. This essentially works out how much it would cost if you were to establish a comparable business to your own, starting from scratch. To do this, you’ll need to add up start-up costs, tangible asset acquisition, the cost of employing staff, developing products, and establishing a customer base. With this list, you’ll then need to look at where you could potentially cut costs, whether it’s purchasing cheaper supplies or relocating to more cost-effective premises. Subtract these savings from the start-up costs to arrive at a business value.

Book value

One of the simplest ways to calculate business valuation is by subtracting your business’s total liabilities from its total assets. The result is your book value, or the value of shareholder’s equity.

Discounted cash flow method

A third option is the discounted cash flow method of valuation. It uses projections of your future cash flows, and then adjusts them to meet current market value. Present value takes inflation into account, so while it’s not completely accurate it gives a more rounded picture of worth than similar options like the earnings multiplier method.

Business rates valuation

You might also hear about a business rates valuation. This refers to the rateable value of your property, determined by the Government’s Valuation Office Agency. It differs from a usual business valuation in that it’s used by the council to calculate a business rates bill.

These are just a few examples of the multiple methods used to calculate a business valuation. Ona a final note, take care not to overvalue your business, as this can impact the viability of investments in the future. It’s always best to err on the cautionary side with business valuation.

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