Facebooktwitterpinterestlinkedinmail

Business Valuation Methods & Determining What Your Business is Worth

Whether you’re preparing for a sale or acquisition, seeking debt or equity financing, or evaluating other strategic business decisions, it’s helpful to have a good pulse on the value of your business. This is a number investors will look at when performing their due diligence, that lenders will look at for risk assessments, and that will help you analyze offers and opportunities.

There is no hard and fast rule for determining how much your business is worth, nor will different valuation methods or strategies yield a single, consistent answer. This is why valuation is said to be more of an art than a science.

Which Business Valuation Method Should I Use?

There are several valuation models that combine company assets, cash flow, risk, comparable, and more to determine the value of your business. The method you use is typically based on your company’s size, industry, and lifecycle stage.

Many investors or lending institutions will have their preferred valuation method and will use this when making decisions about providing funding for your business. However, you should always have your own valuation done as well. It can often be helpful to perform a ceiling and floor analysis of company value (lowest value and highest value) to use as a scale for analyzing offers.

The following are some of the most popular valuation methods to determine how much your business is worth:

1 – Value Company Assets

This is one of the most basic ways for valuing a business. The basis of this method is to look at what the business owns (such as equipment, inventory, buildings, patents), subtract liabilities, and value the business accordingly. The mindset is that since you’d have to buy similar assets to start a similar company from the ground up, the business is worth at least its asset value.

Even though this valuation method seems straightforward, there are still some variations in how to calculate assets. For instance, company assets can include only tangible assets, or can include intangible assets such as brand, reputation, recipes, and goodwill.

One of the flaws in this valuation methodology is that an asset-rich company may not necessarily be generating much revenue (or vice versa). If you’re going to choose this method to figure out how much your business is worth, make sure to also take into account the results from other valuation methods.

2 – Discounted Cash Flow (DCF)

In the discounted cash flow method of valuing a business, the buyer is estimating future cash flow and what it is worth to them today. Discounted cash flow considers how much money your business is likely to make in the foreseeable future, then considers the cost of capital and how stable and predictable that income is perceived to be.

The math for Discounted Cash Flow can be a little tricky, but it’s considered one of the most reliable methods of valuation. Read more about Discounted Cash Flow in this Investopedia article: https://www.investopedia.com/terms/d/dcf.asp

3 – EBITDA Valuation

Your EBITDA value gives you an idea of your profitability as well as your company’s current ability to pay off debts. EBITDA stands for “Earnings Before Interest, Taxes, Depreciation, and Amortization.” To use the EBITDA Valuation method, you will need to find recent comparable sales transactions in your industry.  The appropriate multiple has a lot to do with your industry, revenue growth rates, gross profit and EBITDA margins and risk, etc.  It is common to use a high and low multiple to provide a range for company valuation.


Would you Like to Speak with a Valuation Expert? Contact our CFOs Today


4 – Risk-Based Valuation

Risk-based valuation is based on the factors that make your business more or less attractive, including:

  • Sales and marketing risk
  • Competition risk
  • Reputation risk
  • Social risk
  • Technology risk
  • Management risk
  • Financing risk due to multiple rounds of funding
  • Exit risk
  • Economic risk
  • Legislative/regulatory risk
  • International/currency risk
  • Labor risk
  • Cap table risk

To turn these risks into valuation, they will be rated to the degree of risk each carries. This risk will then be quantified into a value. The risk valuation method is not a common one, but can be helpful for new businesses without historical performance.

5 – Comparables Analysis

In comparable analysis, you’re looking at the value of comparable companies that have recently sold. The challenge here is being able to compare apples to apples with a realistic comp. There are two main types of comp models: common market multiples which uses market comparables to compare an organization against similar companies, and similar market transactions where similar firms were bought out or acquired.


Final Thoughts

Determining how much your business is worth is an art as much as it is a science. It can often be valuable to determine a valuation range, then evaluating offers accordingly.

If you’d like more information about valuing your business, reach out to us by calling 801-804-5800 or by contacting us through our contact form: Contact.


About the Author:

Jerry Vance, Founder & Managing Partner

Jerry Vance is the founder and managing partner of Preferred CFO. With over 13 years of experience providing CFO consulting services to over 300 organizations, and 26 years in the financial industry, Jerry is Utah’s most experienced outsourced CFO.

Read Full Bio


You may also be interested in… 

What is a 5 Year Forecast, and Who Needs One?

What is a 5 Year Forecast, and Who Needs One?

If your company is preparing to raise capital or if you are currently writing a business plan, you may be getting ready to build your 5-year financial forecast. It can be intimidating to plan this far into the future—as well as knowing what kind of projections to...

7 Common Cash Flow Issues and How to Solve Them

7 Common Cash Flow Issues and How to Solve Them

7 Common Cash Flow Issues & How to Fix Them Cash flow-related issues are one of the most problematic for organizations. A study by Jessica Hagen of U.S. Bank showed that 82% of businesses that failed had some sort of cash flow issue. However, many cash flow issues...

5 Common Pitfalls When Financing Inventory

5 Common Pitfalls When Financing Inventory

On September 25, 2019, Troy Skabelund presented a webinar for Navigator Business Solutions to discuss 5 common pitfalls many businesses make when financing inventory. These issues, he explains, are often blind spots to businesses that hold inventory. In this webinar,...

What is a Virtual CFO?

What is a Virtual CFO?

What is a Virtual CFO? A virtual CFO is an off-site, part-time CFO providing high-level financial strategy services. A virtual CFO will help with financial forecasting, systems optimization & reporting, maximizing profits and shareholder growth, preparing for...

Spending Money to Save Money in Business

Spending Money to Save Money in Business

When to Spend Money to Make Money (and When to Not) When it comes to business, most of us live by the axiom that cash is king. We’re stringent with our overhead, careful with our purchases, and strategic with our hires. We also know that there are times you need to...

When Should You Hire a Part-Time Bookkeeper?

When Should You Hire a Part-Time Bookkeeper?

When a company first starts out, the owner is often a Jack-of-All Trades, doing everything from interfacing with clients, developing product, and keeping the books. Although dipping into different disciplines can be exciting, there does come a time when delegation is...

How Much Does a Fractional CFO Cost?

How Much Does a Fractional CFO Cost?

On average, fractional CFO costs $3,000/month to $10,000/month. The most common agreements are between $5,000-$7,000/month for most small- to mid-sized companies. The cost of a fractional CFO depends on the scope of work provided, the size and complexity of the...

What is Cash Flow and Why Is It So Important?

What is Cash Flow and Why Is It So Important?

What is Cash Flow and Why Is It So Important? Many financiers and business owners will agree that there is one four-letter word that is more important to a company than any other. C-A-S-H. Cash within a business is much like the waves of the ocean. It is constantly...

Facebooktwitterpinterestlinkedinmail