How do You Determine the Value of a Company?

Business owners worry about a lot of issues regarding their companies, the main worry being whether they’re providing effective solutions. However viable that may be, every entrepreneur will admit that determining the value of their company and finding out how much their worth is, tops the list of their worries.

Most business owners tend to figure out the value of their company when they want to sell it off or when they want to merge with another company. That should not be the case. It is important to know how much your company is worth, even when you are not planning to sell or merge.

So How do You Determine the Value of a Company?

Calculate the value of the assets

One way to determine how much your company is worth is to calculate the value of all the assets owned by the company. One vital question to ask here is what exactly does the business own? Check the inventory for all the information on the assets owned. Assets include the equipment and furniture within the organization as well as other income generating activities the company may have outside of it.

The employees in the organization are also considered an asset. When determining the value of your company, all the professional and skilled employees are an asset, because without them, the company wouldn’t have made the major strides it did.

Consider the amount of profit the company makes

It is often assumed that the bigger the company, the more profit it makes. That is not always the case. A company can be small but with the right strategies, still become profitable. To calculate the value of the company, consider the amount of profit the business makes each financial year. A good sign for proper valuation of a business is the level of profitability. And profit is the amount the business has after all the expenses have been cleared, not before. The value of a business is placed on the profit it makes.

Seek the services of a fractional executive

If you need executive and professional guidance and perspective on how to determine the value of your company, you will need to hire the services of a fractional executive. These executives work in an advisory level, to help transform your company into what you desire. For instance, you should consider fractional cfo consulting to help the company go smoothly through the transition — this can either be changing ownership or merging with another company. The executive prepares an in-depth report on the financial standing of the business and determines its worth. They also ensure a smooth transition between the seller and the buyer of the company, making sure sale agreement is observed to the latter and the transaction occurs without any hiccups.

Look beyond finances

Determining the value of your business is mostly gauged by the financial muscle, but that is not the only aspect to look at. You can also base your analysis on the geographical location of your business. Is it easily accessible? Is it strategically positioned? Beyond the location, also look at how competitive your company is. Does it have a sustainable competitive edge? What sets you apart from your competitors and do you provide value to your customers? A competitive edge that is not maintained impacts negatively on the valuation of your business.

Estimate the potential of growth

Company valuation does not only look into the past and present records, but also estimates what the company is capable of achieving in future. This is mostly true with investors. Most investors give a company a high value if they realize it has a high potential for growth. Check to see if there is an opportunity for growth and expansion in the near future, or if the industry you are in is expected to boom. The value of a company is based on the current financial standing as well as the future growth.

The value of a company is basically what someone is willing to pay for it, and while determining that value, assume that you want to sell it. How much are you willing to receive in exchange for your business? Is it worth what the business has gathered over the years? Company valuation is important to business owners just as it is to an investor.

For an entrepreneur, knowing the value of your company is important especially if you are looking to raise more capital, sell the business, borrow money for expansion or attract an investor. For an investor, a company’s value helps them to determine the potential return on investment by looking into the potential growth. Most investors look into the gain they can have in future, and not what they can gain immediately they invest. If your company has a high chance for future growth and expansion, then it is best placed to attract an investor.