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How Do You Know What Your Business is Worth?

August 9, 2018

Photo by rawpixel on UnsplashAlthough you might assume that the only time you need to know your business’ value or worth is right before you list the company for sale, having an understanding of what it can be worth can help you map out a plan for your company and shape its future. There are multiple variables you can use to get an idea of the worth of your business.

Look at Your Business’ Assets (and Liabilities)

One way to get a sense of the worth of a business is to examine the value of its assets. Business assets include the property the company owns, any equipment it owns, and its inventory. These are all items a business owner would have to purchase separately if they were starting a company from the ground up.  It’s a good idea to compile a list of your company’s assets, including their current value and the amount your company purchased them for.

On the flip side, it is also important to examine the amount of debt or the number of liabilities your company has. Liabilities detract from the overall value of a business, as they are things that would need to be paid back by a new owner or by you if you continue to own the company.

Look at Your Business’ Earnings

Understanding the profitability of your company allows you to put together a plan for growth (or lets you see if growth is a possibility for your business). Evaluating your company’s earnings can get a bit technical, and it might be worth working with a virtual chief financial officer at this stage to help you put together financial statements and to help you get a clear idea of the worth of your business.

One thing to examine when looking at your company’s earnings is its earnings before interest on debt, taxes, depreciation, or amortization, aka EBITDA. EBITDA can help to level the playing field and give you a full understanding of what your company is bringing in it each month. For example, Company A might earn a gross income of $1,500 per month, have no debt and pay $250 in taxes. Its net income would then be $1,250 and its EBITDA is $1,500. Meanwhile, Company B earns the same amount each month ($1,500), pays $150 in taxes and pays $150 in interest monthly. Its net income is $1,200 and its EBITDA is $1,500. Comparing the two the EBITDA of the two companies, Company B is similar to Company A, at least in terms of actual cash brought in.

Weigh Your Business’ Potential for Growth and Risk

Another thing to consider when determining the worth of your business is its potential for growth and the general riskiness of its industry. Generally speaking, a business that has hit its peak and has nowhere else to go or limited opportunities for future growth might not be worth as much as a business that has less limited growth potential.

Usually, the riskier your business, the lower its overall worth. A buyer purchasing a risky business understands that there might be some possibility of the company bringing in a lot of money. But there’s also the understanding that it’s more likely that the business won’t turn a profit or that various factors can disrupt its earnings, meaning that buyers are going to be less likely to want to shell out a considerable amount up front for a business that might end up losing money in the long run.

Compare Your Business to Similar Companies

In real estate, it’s common practice for buyers and sellers to look at the selling price of similar properties in an area during a specific period. Known as comps, this information can influence how much a seller asks for a property and how much a buyer offers on the property.  You can do something similar with your company to get an idea of its value or worth. Take a look at what businesses like yours have sold for recently. While there are a lot of variables that go into comparing business’ worth, doing it can give you a general idea of what people are willing to pay for a company like yours.

Knowing the value of your business can help you plan out a path for growth or map out the future of your company.  New Direction Capital can work with you to help you get a better understanding of your company’s value and what it means for you now and in the future. Contact us today to learn more.

Photo by rawpixel on Unsplash

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