If you’re looking for investors, planning for selling your business or just want to have an idea about the value of your business having an accurate valuation is essential. There are a variety of ways to determine a business’s worth, and the right method depends on your goals and the situation that you’re in. In this article, Windes explores some of the most popular methods to find a business’s worth and exposes the pros and cons of each.
Book Value
The book value method is a complete list of all assets and liabilities in your company’s accounts, including tangible and non-tangible assets such as inventory, equipment, and property. The formula is straightforward: net worth is equal to assets minus liabilities. Pros: This is a fast and simple method of calculating a business’s liquidation value, which is the amount it would be worth if all assets were sold off today at fair market value. Cons: This method may not include intangible assets as well as the debts that were accrued over time.
Revenue Multiplier
To assess the value of a company, simply multiply the revenue of its sales by an industry multiplier. A virtual reality design studio, for instance may have a large income, but a poor high end virtual data room systems profit. But a typewriter parts maker could have a lower income, but higher profit. This is an excellent method to monitor growth and predict future earnings, but it does not take long-term business expenses into account. This is the reason it’s recommended for smaller companies that don’t rely on large capital investments or loans to operate.