1 (801) 804-5800 info@preferredcfo.com
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.


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… 

Determining the Payback Period of a Business Investment

Determining the Payback Period of a Business Investment

Whether implementing a new software system, adding office space, acquiring another company, or any other substantial investment, companies want to know how long it will take to recoup the money they spend on major purchases. The way to determine this is by calculating...

10 Steps to Prepare for Raising Capital

10 Steps to Prepare for Raising Capital

Finding funding for your business is a process that takes a lot of time and effort, especially during the startup phase. Many entrepreneurs fail in their first attempts at fundraising because they are poorly prepared. Others get themselves into trouble by choosing the...

How Can a Fractional CFO Help You Save Money?

How Can a Fractional CFO Help You Save Money?

In these days of economic challenges and changes, many companies struggle with uncertainty about the future, seeking tools and resources to best position their businesses for financial success. Often it can be beneficial to bring in a financial advisor who has...

What is a Capitalization Table and Why Does it Matter?

What is a Capitalization Table and Why Does it Matter?

Capitalization tables, commonly called “cap tables,” are highly useful spreadsheets maintained by companies that have multiple owners or investors. Cap tables are especially important for private companies at startup and in the early stages of the enterprise. They...

Top Benefits of Financial Staff Augmentation

Top Benefits of Financial Staff Augmentation

Many companies experience times when they find their accounting departments short on staff or short on expertise. Sometimes emergencies and financial needs arise that are beyond the capability of their financial personnel to address. This is particularly true in times...

Qualities of an Effective Profit & Loss Report

Qualities of an Effective Profit & Loss Report

A Profit and Loss (P&L) Report, also called a Profit and Loss Statement, is a key financial document that details a company’s income and expenses over a specific period of time. This time period is typically a month, a quarter or a year. Depending on company needs...

What Is a Quality of Earnings Report?

What Is a Quality of Earnings Report?

When a business sale, acquisition, or major investment is contemplated, one important step in the due diligence process is the generation of a Quality of Earnings report, sometimes abbreviated as QOE. Even though a company may have strong financial statements, those...

What Is the Purpose of Accrual Accounting?

What Is the Purpose of Accrual Accounting?

What Is the Purpose of Accrual Accounting? There are two methods of accounting: cash and accrual. In cash accounting, transactions are recorded when payment occurs. In the accrual method, revenues and expenses are matched and recorded at the time the good is delivered...

3 Things to Know Before Choosing a Supplier

3 Things to Know Before Choosing a Supplier

Choosing the right supplier for your business can be complicated, especially if a large portion of your product comes from a single company. For many companies, supplies are secondary only to labor in their expenses. But choosing the right supplier has even more...

How Does a CFO Influence Strategic Decisions?

How Does a CFO Influence Strategic Decisions?

In every company, there are important decisions to be made on a daily basis. Some decisions are mundane and have only short-term consequences. Others are strategic and can affect the company’s performance and profits for years. Too often, these critical decisions are...

CFO Hiring Guide: Analyze Your Needs & Maximize Value

CFO Hiring Guide: Analyze Your Needs & Maximize Value

Whether your business is a startup or an established enterprise, you need a strong, agile financial team with a highly competent leader. Some companies think they can get by without a Chief Financial Officer (CFO) until they start preparing to go public. Other...

Financial Expert Roles & Responsibilities

Financial Expert Roles & Responsibilities

It’s not uncommon to have difficulty differentiating between the main financial professionals. Not only are the names similar, but they are also often unintentionally used interchangeably. However, despite how the titles may be used colloquially, there are distinct...

Facebooktwitterpinterestlinkedinmail