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Whether you’re selling your business, looking to buy someone else’s, or you just want to know how much your business is worth, business valuation is something everyone needs at some point.
Once you know how much a business is worth, you can make an informed decision about whether buying or selling is worth the risk, and you’ll be able to know if you’re overestimating a business’s worth or at risk of being ripped off as a seller. Read on to learn how to accurately assess a business’s value.
The 7 Best Business Brokers For Valuing a Business
If you want an accurate valuation for your business from an expert, we’ve put together a list of the best business brokers money can buy. They have years of experience, great reputations, and the resources to get you the best possible deal.
Here are our top 7 picks for the best business brokers:
- Business Exits — Best for Maximizing Business Value and Sale Price
- Woodbridge International — Best For Creating High Demand and Multiple Bids
- Peterson Acquisitions — Best For Fast Business Valuations
- Synergy Business Brokers — Best For Buying Industry-Specific Companies
- Transworld Business Advisors — Best For Buying a Franchise
- Sunbelt Business Brokers — Best For Selling Companies With Low Annual Revenue
- Calhoun Companies — Best Business Broker For Commercial Real Estate
Value a Business in 6 Easy Steps
Once you have all the right information together, valuing a business isn’t nearly as scary as it sounds.
In this guide, we walk you through the data you need to collect, the steps you need to take, and the things you need to consider to decide how much a business is worth.
- Get the Numbers Together
- Understand The Assets
- Understand The Risk
- Combine Valuation Methods
- Look at the Market Value
- Use a Business Broker
Step 1: Get the Numbers Together
Although it might be tempting to jump straight into working with a business broker, the first thing you should do is get the financial numbers for the business organized.
Even if you do work with a broker from the start, you’ll still need to be able to tell them how about the business earnings, the assets, and whether there are any liabilities.
If you are valuing your own business and you’re using an accountant or bookkeeping software, this should be easy. They’ll probably have all the required information on hand, especially if they’ve been keeping a balance sheet.
When valuing a business, all the different numbers are taken into account, so you need to get a report of everything. This includes profit margins, assets, debts, rentals, and even tax interest.
Here’s some of the information you’ll need to know:
- Annual revenue
- Money from sales
- Cost of goods
- Numbers from past financial statements
- Numbers from previous tax returns
- Total expenses (including both recurring and non-recurring)
- Number of employees and their compensation
- Any rental or building ownership information
- Any debts or loans
These are just some of the basics. Depending on what the business does and how long it’s been running, you might need more information or different details. Do some research in your industry to find out what else is usually considered when valuing a similar business.
The goal of the first step is just to make sure that you have a good understanding of where the business’s finances and assets are so that you can start to assess how valuable the company might be.
There’re lots of factors that make up a business valuation, so in order to avoid undervaluing a company, you need to make sure you have all the facts up-to-date and ready to present.
Once you’ve gathered as much information as possible and you’ve created a file organized in an easy-to-understand way, you can move on to step 2.
Step 2: Understand The Assets
The next step is understanding the assets that the business can offer and exactly what would make it appealing to a buyer.
You will need to take all of the information you’ve just collected and try and pull up a rough number that the business is worth or gaining, using:
- Projected Growth
If you understand all the benefits and you’re buying, you’ll know what the business is worth, and if you’re selling, you can convince a buyer to pay more. Another factor to keep in mind is how successful the business has been long-term.
If it’s a new business, you can look at the month-to-month growth and use projections to see how much the business is likely to grow in the future. It’s better if the company has been established or growing successfully for several years because that indicates that it’s likely to keep going and it’s a safe investment.
The main things that buyers look for in a business are safety, ROI, and high growth potential.
A key part of being able to value a business is to be able to weigh up those things against any future risk.
This takes us to step three.
Step 3: Understand The Risk
Once you’re clear on the assets of the business, you then need to look at the downsides and the risk.
This can include things like:
- Operational costs
- Low profit margins
- Debts and loans
- Unstable growth
- Poor economic conditions
Businesses that have successfully grown for several years, with high-profit margins, and that don’t have any debts are a lot more attractive to potential buyers and, therefore, will have a significantly higher valuation.
If you’re valuing your own company, it is better to just be honest about risks because a business broker or buyer will be able to access this information eventually. Plus, once you know the potential risk and your liabilities, you can limit those and better justify them to potential buyers to avoid losing too much value.
If you’re valuing someone else’s company with the intention to buy, this is the most important step for you to take. You need to evaluate the risk to your investment and how likely you are to lose money and factor that into your offer when it comes to the sale.
Once you’ve got a clear idea of the assets and the liabilities, you are now able to move on to the next step and start valuing the company as a whole.
Step 4: Combine Valuation Methods
When valuing the company, there are a few different methods that you can use.
While some are extremely complicated and better left to business brokers, there are a couple that are easy enough for anyone to do:
- The Book Method: This method is pretty easy: you just subtract the liabilities from the assets. You take all of the financial numbers that you’ve pulled from the assets of a business and subtract the amount of risk or liability that you calculated when looking at the negative aspects of the business. This will give you a number that represents how much the business is worth right now. However, a buyer isn’t just buying a business now; they’re buying the potential profits for the next few years. That’s where the next method comes in.
- Earning Multipliers: This method relies on looking at the ability of a company to continue making money as time passes. This method focuses more on future predictions and bases its value on how likely a company is to keep turning a profit and growing steadily. This method uses the current earnings before interest and tax (EBIT) and then assesses the value based on that number multiplied by the potential for future earnings. So if the assets and liabilities are valued at $100,000 with a five-year multiplier, the business’s value will become $500,000.
While there are occasions where these valuation methods can be used individually, it’s better to use both of them. This will give a much more rounded valuation of both what a company is worth now and what it will be worth in the future.
Step 5: Look at the Market Value
The next step for valuing a company is to look at its market value based on similar companies and what they are selling for.
This is to help buyers avoid buying businesses and industries that are predicted to crash or that are not performing well due to a variety of economic factors. It also protects sellers who have new businesses in emerging sectors from undervaluing themselves.
This step is pretty easy because it just requires you to be aware of your industry’s current market. The only thing you need to watch out for is that you’re making a fair comparison between other businesses and the business you’re valuing.
If you see another business selling for much less than you valued the company you’re looking at, that could be for a reason like lots of liability or debt. Always keep in mind that there will be elements of someone else’s business that you don’t know about, so just use this as a rough benchmark for whether your valuations seem right or not.
Once you’ve followed all the steps, you should have a few numbers to give you a ballpark of how much you think the company is worth. This won’t be a final valuation because that will be decided at the point of sale.
Once you’ve got a rough idea of how much you think a business is worth, it’s time to move on to the next step.
Step 6: Use a Business Broker
Honestly, you can avoid all of the other steps on this list by just going straight to a business broker. But it’s always best to have a rough idea in your head of what your business is worth before you approach a broker.
Sometimes brokers can make mistakes, and they don’t know your business as well as you do. Doing a basic valuation yourself first protects you from underselling your business and regretting that decision later on.
If you want help to choose the right business broker for you, we’ve put together a list of our top recommendations. You can read the review here to see which one is right for you.
When you are choosing a broker, there are a few things that will affect who you work with. These include:
- Your Annual Revenue: Some brokers only work with businesses worth over $1 million dollars.
- Whether You’re Selling Or Buying: Some brokers are more tailored towards sellers, and some brokers are better at helping businesses trying to sell.
- Experience: Some brokers will be more experienced in certain industries, and you should try and find one that works with similar businesses to you.
Once you choose a broker, they’ll probably do their own valuation of the business, and they might then give you a different number than you found when you did it yourself. Just because they are an expert, it doesn’t mean that you can’t have a discussion or question them if you think they’ve made a mistake.
A good broker should be happy to have the conversation and explain to you why they’ve got those numbers. Part of the reason we went through the first five steps is so that you are informed when talking to a broker and able to advocate for the best deal.
Once you find a good relationship and you’re confident in the details, you’ll work with your broker to decide on an official valuation for the business. You can then make a plan to either buy or sell the business you’re interested in.
The best thing about working with a broker like Business Exits is that they’ll be able to help you with the next few stages of a sale right through until the end.
Final Thoughts About How to Value a Business
Valuing a business is essential to getting a good deal, whether you’re buying, or selling a company. And, if it’s your own, you can use this information to secure loans and investments and calculate taxation.
On a last note, though, we still recommend using a broker. Even if you can successfully value a business yourself after reading this guide, it’s still worth it to work with an expert and let them find you the best deal.