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 Outsourced CFO Utah

Jerry Vance

Jerry Vance is the founder and managing partner of Preferred CFO. With over 16 years of experience providing CFO consulting services to over 300 organizations, and 30 years in the financial industry, Jerry is one of the most experienced outsourced CFOs in the United States.

You may also be interested in...

Virtual CFO Services: A Catalyst for Business Success

In today's dynamic business landscape, having a strategic financial perspective is more crucial than ever. However, not all businesses can afford to have a full-time Chief Financial Officer (CFO) on their roster. Many choose instead to utilize virtual CFO services – a...

Key Performance Indicators for Financial Success

Financial Key Performance Indicators (KPIs) are crucial measurements of a company’s fiscal health. These metrics provide a window into the current and projected profitability of an organization, enabling managers and stakeholders to make informed decisions. By...

Inventory Strategies to Enhance Profits

For many businesses, product inventory is their biggest asset. Effectively managing the inflow, storage, and outflow of inventory is critical to the financial success of the company. When inventory management is done right, customers can place orders with confidence,...

Meet Tom Applegarth Outsourced HR Solutions

Preferred CFO recently added Human Resources Veteran, Tom Applegarth, to the Preferred CFO team to offer outsourced HR services in addition to or standalone from outsourced CFO services. In this video, Tom introduces his experience and key benefits he offers Preferred...

Strategies for Managing Labor and Benefits Costs

Your employees are the lifeblood of your business. However, labor is also typically the highest cost for most businesses. Costs associated with hiring, training, compensating, retaining, rewarding, and managing employees can easily spiral out of control when there is...

2023 SaaS CFO Guide

A SaaS CFO is a chief financial officer with specific experience in the Software as a Service (SaaS) industry. A SaaS business is different from traditional businesses that require a one-time purchase or otherwise brief relationship transaction as a SaaS company...

Cost Analysis and Price Analysis

Cost analysis and price analysis are two important procedures that are used by businesses to calculate the true cost of a product or service and determine the best sales price. By understanding and correctly utilizing these processes, businesses can make informed...

How to Conduct a Market Analysis

Before starting a new business—and periodically thereafter—it is important for company executives to carry out a market analysis, also called a market evaluation. Most entrepreneurs conducted a market analysis (to the best of their abilities) when they were developing...

What Is a Fractional CFO and What Does a Fractional CFO Do?

A fractional CFO is an experienced CFO who provides services for organizations in a part-time, retainer, or contract arrangement. This offers a company the experience and expertise of a high-end CFO without the in-house cost—salary, benefits, and bonuses—of a...

What is GAAP and Why is it Needed?

Generally Accepted Accounting Priciples (GAAP) Financial reporting is an important part of business that communicates the financial performance and results of a company. It records and presents information about the company’s financial position, revenues, expenses,...

Easing the Financial Year-End Close

The end of the fiscal year can be highly stressful for financial officers and corporate executives. The year-end closing procedure is time-consuming and sometimes brings unpleasant surprises. Particularly in times of economic downturn and short staffing, year-end...