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.
Three approaches to determine business value
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…
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.
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!