How To Value A Business Quickly: Best Business Valuation Formula
If you are asking, how to value a business quickly? The answer can be complicated. But, you can get started with this calculation: business value = assets – liabilities
As you figure out the best way to sell your business in California, there are several strategies to calculate your business value, increase your company’s value, and get a certified business valuation professional on your side. Read on.
Business Valuation Formula
There are different types of valuation. Below are five of the most common business valuation formulas a business broker would use in California when selling your business.
The Cost Method
First is the cost method, also referred to as the asset-based approach. The certified valuation expert will analyze the present value of your business’ net tangible assets. From here, the valuation expert would subtract your liabilities from these assets to calculate your company’s fair market value. Companies in the wholesale and distribution market niche benefit the most from this approach because of the number of assets these enterprises would own.
The Income Method
The second business valuation formula is the income method. A certified business broker with many years of experience will evaluate the future business value and convert it into a present-day value. The company’s cash flow is a primary determinant in this business valuation example. Businesses that are well-established and deliver reliable revenue numbers will most likely receive a high valuation. For example, to answer the question that many business owners in California ask: “how much is my company worth?” Business Value = Annual Future Earnings/Required Rate of Return.
The Market Method
Third, the market method involves an efficient analysis of historical sales from competing enterprises. From here, the business broker will determine the company’s value itself. Market multiples, which value the financial metric relationship of similar companies, are the main drivers of this valuation. These multiples include amortization (EBITA), tax depreciation, and earnings before tax.
The Market Capitalization Method
The market capitalization valuation method might be the most straightforward and common approach on the list. To calculate this valuation, the business broker multiplies the total amount of outstanding shares and the company’s share price. This product of this calculation serves as the company’s valuation.
The Book Method
Lastly, the book value method is driven by data. It utilizes balance sheet numbers and the shareholder equity value to get a final figure. A simple formula involves subtracting the total amount of liabilities from total assets.
How Much Your Business Is Worth?
If an interested buyer seeks you out about buying your business, it is critical to know how much your business is worth. So, how to value your business for sale quickly? Two things determine how much someone else will pay for your company: relative risk and return on investment (ROI).
ROI is essential because it tells you the amount of additional profit you made off your investment. Finding out your net profit means subtracting all the company expenses you pay, including salaries, rent, tax, and more. We express ROI as a percentage, and the formula is as follows:
- (Return/Original Investment) X 100% = ROI (%)
For example, let’s say that you invested $100,000 into your business and walk away with $20,000 in return profit. Your return on investment, expressed as a percentage, would be:
- ($20,000/$100,000) X 100% = 20% ROI
Buyers will want to know this figure because it forecasts what return they could make. The ideal ROI depends on the amount of risk someone takes on. The potential ROI should be higher for someone buying a risky business. A company with ten years of consecutive rising revenues will not be as risky as a new startup two years into the game.
The biggest driver in the ROI calculation is the return. Calculating EBITDA (earnings before interest, taxes, depreciation, and amortization) is what we do to find the return. There are different ways to apply the EBITDA formula:
- EBITDA = amortization + depreciation + operating profit
- EBITDA = amortization + depreciation + taxes + interest + net income
EBITDA is one of the most important valuation tools to use because it serves as a placeholder for cash flow. It can provide buyers with an efficient estimate of your business’ value. California business brokers can also multiply EBITDA by valuation multipliers from business buying and selling, transactions, and research reports.
Valuing and Selling Your Business Quickly
If you are a business owner based in California and looking to sell your business, aside from knowing how to calculate what your business is worth, you want your value to be as high as possible. There are several valuation approaches and strategies to amplify the value of your business, including the ones below.
The first step is ensuring you have robust financial controls and processes in place. Having strong systems in place means organizing your books and financial statements effectively. Your company not only needs strong bookkeeping, but it also needs a detail-oriented accountant to monitor this information.
Next, your California business needs a unique product or service that solves a glaring human problem. Innovative products, combined with a strong marketing plan, mean consistent revenue numbers. The best businesses solve problems externally for their customers. They do not create a product based on internal motivations. The most valuable enterprises listen to their customers’ pain points and deliver.
Risk and volatility can impact any business. However, the most valuable enterprises have strong plans in place to find, mitigate, and monitor risk within the business. Volatility can come in many forms: employee turnover, profit margins, and supply chain hiccups. When buyers approach you, they will want to know what your strategy is to address these things.
You could have the best product in the world, but your business is doomed if you do not know how to market it. Your company must understand how to position its brand, product, or service in front of your target markets. We live in a digital age with digital channels competing for our attention. Your business must have creative marketing activities in place.
Why Hire a Certified Business Broker to Value a Business Quickly?
Learning how to calculate your business value can be tricky. Valuing your business often seems like a tall task, which is why a certified business broker like Rogerson Business Services located in Sacramento, California, can help take the stress away. There are several reasons why should consider having an expert broker on your side:
- Certified business brokers organize all the required documents and legal papers to go through the valuation process.
- Certified business brokers serve as a critical liaison between you and your potential buyers.
- Certified business brokers make sure there are no tasks left undone when it comes to closing the sale and due diligence.
The business valuation approaches, as well as the decision to exit business ownership, is a significant life event. There could be plenty of emotions involved. When you collaborate with a business brokerage firm, it will provide all the solutions and insights toward getting the most out of the business sale.
There are only a few ways to sell and value a business quickly in California, and an experienced business broker like Andrew Rogerson can guide you through the best strategy.
It is currently the perfect storm to value and sell your business in California. With the great resignation that started during the pandemic and the trend to continue till 2023, there are no shortages of experienced and well-financed buyers looking for the next opportunity to grab.