Want to sell your business, or planning on buying one? Getting a precise Company Valuation from the sales perspective can be tricky. The worth you think of your business and what the other party thinks of it are two different things.

For those who are buying a business, its worth may hinge on how much profit it is making and the amount of risk involved.

Besides, cash flow in history, asset values, and profitability are the starting points. It is often the difficult-to-measure aspects such as key commercial relationships & benevolence that offer the maximum value.

Factors that affect business feasibility?

Basically, the following three aspects affect your business value:

  • Sale circumstances
  • Operation years
  • Tangible and intangible assets

Sale circumstances

The major reasons for selling a business can impact its value. A forceful sale will bring down the sale value. For say, a business owner in poor health condition may accept the first buyer while an owner generally negotiates so that they can get higher prices.

Operation Years

Longer the business operation years, better the trach records, loyal customers, and cash flow.

It may vary for certain kind of businesses that have been trading only a year or two, like bars, cafes, etc. These companies may experience high customer demand, but the market may turn away.

Company Valuation

Tangible and intangible assets

A business with physical assets such as property, types of machinery, or stock items is called a tangible asset. These will have a certain resale value which makes business easier to evaluate higher value.

Some businesses have intangible assets that might have significant values like customer goodwill, well-reputed brands, and potential & intellectual growth.

The intangible assets can be difficult to value. Hence, you need the help of professionals while thinking, “Should I Sell My Business”.

Basic business valuation approaches

Don’t forget that the true value of any business is always what a person is willing to pay for it. To come across solid figures, buyers must use numerous valuation methods.

Some of these approaches involve:

Value of the assets

For a general business asset valuation, including the assets of a business and minus the liabilities. You might wish to use a business calculator for the task.

So imagine you have $500,000 machinery and equipment value, and you have $50,000 in the outstanding invoices, the value of the asset in this condition will be $450,000

Being a buyer, you can decide to buy the assets of a business instead of taking over the entire business due to some ongoing concerns. This way, outstanding tax payments or debts are easy to pay by the previous owner.

The ratio of price earning

The P/E ratio or price earning ratio is the value of a business which is divided by its after-tax profit payment. For say, a company has a share price of $40/share and earnings on each share after tax of $8 would be a P/E ratio of five.

[40/8=5]

When calculating a business value, use the equation:

Value = After Tax Earning × P/E ratio

The simplest way of Business Valuation is to hire professionals who will do everything for you.

Source: How is Business Valuation done? A glimpse of the procedure