The process of assessing the value of your business

November 15, 2022

The Process of Assessing Your Business’s Value

Assessing your business value involves determining the worth of your business over a certain period. This is usually done by analyzing all the factors contributing to your business’s economic value.

Normally, a business valuation company considers the key indicators of the business’s health, such as the business leadership, the value of the assets (both tangible and intangible) owned by the business, and the future expected earnings.

Perhaps you’re planning to assess the value of your business. In this case, if you don’t plan to leverage the help of a business valuation company, we’ll take you through the process. However, it is worth noting that evaluating a business involves rigorous calculations since they form the baseline for estimating your business’s value. Let’s plunge in right away.

Calculate the net worth of the business

A business’s net worth is determined by adding up the value of all the assets owned by the business and subtracting the liabilities.

Note that the calculations should exclude future expected profits and intangible assets. Therefore, the value shows you how much the business is worth without debts and any liabilities the business might have.

Check on the market value of the business

Check on the investors’ perception of the business. You can effortlessly achieve this by comparing your business with other businesses and making intelligent assumptions.

Your business’s market value can be calculated by either calculating the value of all the shares or by checking out similar businesses in the same market that have sold out well.

Check the cash flow

A venture cash flow is determined by evaluating the business income and comparing it to the expected income that the business has set. However, for accurate figures, we recommend that you leverage the services of financial institutions since this is one niche that they excel in.

Determine the value of intangible asset

Intangible assets are the company’s properties that cannot be physically identified. These assets include trademarks, goodwill, patents, and brand recognition.

Although these assets are not physical, they contribute significantly toward the value of your business. For instance, the company’s trademark is subject to change depending on the surrounding factors affecting the company.

Capitalization

Although this method is similar to finding your business’s market value, the two are slightly different. Capitalization is arrived at by finding the total value of the business shares and multiplying it by the number of shares in total.

The value you get after calculating the total number of shares owned by the business is what is referred to as the capitalization value. Capitalization is the easiest way to determine your business’s value because you just need to know the value of each share and the number of shares the business has.

Limitations of business valuation

While business valuation is an integral process, especially when planning to sell off your venture, you may hit some snags when calculating your business’s worth. Here are just a few of them.

  •  It can be overwhelming to choose the right approach to use. Availability of different approaches to determine the value of your business could be challenging for most people. Some are straightforward but less reliable, while others are quite reliable but very complex for a typical businessman to execute.
  • There is no specific approach best suited for a certain business type. Every business is unique and varies significantly. This calls for a specific approach to each business type. This can be overwhelming for most people to choose what method is appropriate for their business.
  • Different approaches could provide different outcomes. If you use different techniques, you could end up with varying figures, confusing you further on what to opt for.
  • Assessing the value of your business could be costly. Unless you are a financial expert who can independently assess, you will need to hire a business valuation company or a bank to conduct the exercise. Hiring either of these to evaluate the business could be costly to the business.

Conclusion

Business valuation is an essential process as it helps determine your business’s net worth. It comes in handy when planning to sell your business, and it is also an integral tool for the buyers when determining the right price to buy out the business.

Calculating the value of your business is also helpful when you want to engage investors or when planning to sell out a percentage of the shares. It is, undoubtedly, a great way to monitor your business performance. The figures you get from the calculations can show whether the business is making losses or profits. A business owner can easily track business operations and keep it on the right path.

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