Over 50% of business owners try to sell their businesses on their own. But because of the complicated selling process, while managing operations, most of them fail.
One of the most important factors in selling successfully is evaluating your business correctly.
In this article, we’ll cover the business valuation formulas that you can use to measure how much it’s worth so that you can sell your business to move on to greener pastures.
Keep reading to learn more.
How Is a Business Valued?
Pricing a business isn’t easy. What you think your business is worth and what other people think your business is worth are two completely different things.
For someone interested in buying a business, they start by thinking about things like:
- How much profit it will make
- The risks involved
- Historic cash flow
- Asset values
But as they get deeper into the research, they will start to look at things like the circumstances of the sale, tangible vs. intangible assets, and years of operation.
Business Valuation Formulas: Different Methods
The true value of a business is simply the number someone is willing to pay for it. However, people will use different valuation methods to find that number. Let’s take a look at a few.
For an asset valuation, just simply add up the assets of the business. Next, subtract the liabilities. Using a business value calculator can be helpful here.
For example, if a business has $500,000 in equipment and owes $100,000 in outstanding invoices, the business value would be $400,000.
This valuation is useful for stable, asset-rich businesses.
Price Earnings Ratio
This method of valuation measures the price-earnings ratio (P/E ratio). This is the value of the business divided by its profits (after tax).
For example, if a business has a share price of $40 and has earnings per share after tax of $5, it would have a P/E ratio of 8. (40/5=8).
After finding this magic number, just multiply the company’s recent profits by this figure. If a business has post-tax profits of $100,000, then the business valuation would be $800,000.
Entry Cost Valuation
Another way to make a valuation is to make a similar company from scratch. See how much the process would cost you. You can add up things like:
- Purchase of assets
- Development of products
- Hiring and training employees
- Building a customer base
After doing this, you can compare the numbers that you came up with to the price of the company.
Let’s take a look at an example:
- Set-up equipment: $500,000
- Overhead: $50,000 a month
- 12 months needed to build a customer base
We could say that a business that already has all of this is worth around $1.1 million [$500,000 + (12 x $50,000)]. After you get this number, you can add in other costs and make a fair evaluation.
Evaluate Your Business Correctly
That’s a quick introduction to how to use a business valuation formula to find the value of your business. It’s a very useful tool if you’re looking to sell so that you can retire or fund another business.
If you’re a small business owner, you need all the help you can get. CreditPush has everything you need to succeed and boost your business’s financial health. Get started with us today!