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

Preferred CFO founder and managing partner Jerry Vance of Utah

Tom Barrett is a skilled CFO with extensive experience. His financial expertise is key to helping companies with strategic financial planning, data analysis, risk assessment, budgeting, forecasting, cash flow management, and much more.

You may also be interested in...

Assertiveness Training for Recruiters

Assertiveness Training for Recruiters

Having spent over 30 years as an HR professional, I’ve seen firsthand the critical role recruiters play in sourcing and selecting top candidates. My experience spans roles such as head of Talent Acquisition for a Fortune 500 company, leading HR for divisions with over...

What Does a Chief Financial Officer Do?

What Does a Chief Financial Officer Do?

Introduction A Chief Financial Officer, or CFO, is a senior executive responsible for managing the financial actions of a company. The CFO's duties include tracking cash flow, financial planning, analyzing the company's financial strengths and weaknesses, and...

Top 5 Benefits of Outsourcing Human Resources

Top 5 Benefits of Outsourcing Human Resources

Outsourcing has become a popular strategy for businesses looking to streamline operations and maximize efficiency. Outsourcing human resources (HR) can be a great advantage for growing companies trying to manage an expanding employee base. When it comes to managing HR...

Leveraging Financial Ratios to Assess Company Performance

Leveraging Financial Ratios to Assess Company Performance

Overview Financial ratios are crucial tools for any business or investor looking to assess the financial health of a company. These ratios provide insights into various aspects of a company's operations, such as liquidity, solvency, profitability, and efficiency....

Exploring Different Financing Options for Business Expansion

Exploring Different Financing Options for Business Expansion

Exploring different options for business expansion is essential for companies looking to thrive in today’s dynamic business environment. By expanding their businesses and benchmarking financial performance, entrepreneurs can unlock new opportunities, drive sustainable growth, and achieve their business objectives.

Why Preferred CFO’s HR Solutions Trump Corporate Giants

Why Preferred CFO’s HR Solutions Trump Corporate Giants

In the complex terrain of human resources solutions and payroll management, corporate giants like ADP and Paychex are often the go-to for their seemingly comprehensive solutions that cater to businesses of all sizes. Yet, the reality for many clients is a growing...

Business Budgeting Essentials

Business Budgeting Essentials

Crafting and implementing an effective business budget is a dynamic and ongoing process. With a strategic and adaptable budget, businesses can enhance financial stability and pave the way for sustainable growth.

Tax Planning Strategy For Small Businesses

Tax Planning Strategy For Small Businesses

Business Tax Planning Strategies:A Small Business Owner's Guide to Savings & Compliance Effective tax planning isn't just about minimizing liabilities; it's about strategically positioning businesses for long-term success. From small enterprises to larger...

Facebooktwitterpinterestlinkedinmail