determining the value of your business is a subjective process.
If you have ever thought about selling your business, perhaps one of the most difficult questions you have had to ask yourself is: How much can I sell my business for?
Regardless of what anyone tells you, determining the value of your business is a subjective process. The value of a business in one person’s hands can be completely different to another. However, there are a variety of methods to determine the value of a business. Some methods are fairly simple and others are a bit more complex.
1. Net Asset Value
Perhaps the simplest method that can be used to value your business is to determine its net asset value (NAV). This simple method entails subtracting the value of the liabilities from the value of the assets.
2. The ‘Multiples’ Approach
Another method that can be used to value a business is to apply a specific multiple to a financial metric. This method is referred to as a ‘multiples’ approach. For example, a company’s net profit could be multiplied by a specific number to give you a value of the business.
The number which you multiply the earnings by is referred to as a price earnings (PE) multiple.
The size of this number will depend on the business in question and a number or factors, for example its growth prospects, its size and the industry in which it operates, the risk in its sustainability, owner involvement, etc..
3. Discounted Cash Flow Method
The final approach that can be used to value a business is the discounted cash flow (DCF) method. Under this method, the business is valued using cash flows that the business is expected to generate in future.
Cash flows can take the form of future dividend payments, or if the business pays no dividend, cash flows can take the form of profits generated by the business after adjusting for future capital expenses, investments in working capital and taxes payable.
As this method values a business using the cash flows it is expected to generate in the future, a discount needs to be applied to these future cash flows (to reflect the uncertainty thereof), the size of which increases the further out in the future the cash flow occurs. The aggregate value or sum of these discounted cash flows represents the estimated value of the business.
These three valuation methods (NAV, multiples or DCF) can yield different values for a business, and deciding which method to use will often depend on the purpose of the valuation as well as the specific business being valued.
We at Sentinel Commercial Services combine the above valuation methods to determine he most accurate market related value of a business. We also add our valuable market knowledge and experience to provide fundamental insight into the understanding of the value of your business and the time it might take to sell your business for the amount you want!
*Although our speciality is selling businesses, we also offer Business Valuations for a fee. If you decide to sell your business, this Valuation fee is deducted from the commission.