When you’re building businesses, you need to understand how to value them. You may want to work your business long-term, or you may want to sell it while it is in its growth period. In this article, we are going to talk about three valuation methods for your business model that you need to know about.
Knowing the value of your business will help you understand where you are and where you are going. Using a business valuation calculator Australia will make it easier for you. Even if you use these calculators, the following information will help you understand how the process works and what it means to your business.
What Are Business Valuation Methods?
Before we get into these three business valuation methods, you need to understand what they are. To put it as simply as possible, business valuations are methods to tell how much a business is worth currently.
Depending on the type of business valuation you get, your valuation may include your assets, management structure, share price and more. There are multiple reasons you might want to get a business valuation, but the main two are because you are selling or because you are seeking investors.
The size of your business, your industry, and other factors can change which type of valuation you need to have. If you are confused, speak with a professional about the best way to move forward. Continue reading below to learn more about the three top valuation methods.
1. Market Value
Market value business valuations are subjective, and sellers usually do not want to use this method of valuation when selling their business. Market value business valuations find your business value by comparing your business to similar businesses that have sold recently.
To get an accurate number with this method, you need to have significant data on the companies that sold. Most small businesses don’t have access to this information which makes it difficult to find out how much your business is worth. If your business has enough resources, you can get a decent idea of how much your business can sell for, but you shouldn’t use this valuation method on its own.
You should know that no matter what you conclude your business is worth if you are selling your business or looking for an investor, it’s a negotiation process. If you’re under stress to sell or find an investor, you are likely to get less money than if you can hold out throughout a long negotiation.
2. Asset-Based
Asset-based business valuation takes all your business assets like the stocks, business equipment, goodwill, and other assets and adds them together. You take your asset value and subtract the liabilities to get your business value.
There are two ways to do the asset-based business valuation, and these are:
- Going Concern
- Liquidation Value
Going concern is for businesses that do not plan on liquidation. With going concern, your business’ current total equity is taken into account.
Liquidation value is for businesses that are finished. When the business is finished all assets will be liquidated, and the money from the liquidation will be collected. Liquidation value has a sense of urgency and doesn’t last for long since the value of liquid assets can change.
3. ROI-Based
The market you are in determines what a good return is. Some industries have higher ROIs than other industries naturally. You should research to see where your business falls, so you have an understanding of how your business is doing.
If you’re looking for investors, most investors want to know how long it will take to get their initial investment back. Many investors have a number in their head about how much money they want to be able to make off their investment, and if your business doesn’t cut it, they will walk away.
If you ask for $250,000 for 25% of your business, you are saying your business is worth $1 million. If you’ve watched shows like Shark Tank, you’ve seen plenty of people tell the sharks how much money they want for a certain percentage of their business. Many more times you’ve seen the sharks laugh them out of the building.
Make sure you understand the figures in your business, so you are using realistic figures. You can’t just say your business is worth $35 million without any proof. Many people find it helpful to have a valuation done by a professional company, so there is no guesswork.
Get the Most Out of Your Business Sale
If you are selling your business, your business needs to undergo a business valuation. Without a proper business valuation, asking prices are only speculative. While the buyer wants to make the price of the business lower for more of their own profit, the business owner wants to believe the business is worth more.
Having a professional business valuation done will ensure the numbers are concrete. Most valuation companies provide your business with a certificate that will show exactly how much it is worth. Get a valuation well before you are ready to make the actual sale to see where you are and what you need to do to make your business more attractive to buyers.
Working with a reputable and experienced company will help you get the best valuation for your business. Do your research before working with a company to value your business.
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I like that you talked about the return of investment to be a basis of business valuation for prospective buyers. My wife and I plan to start a food-related upstart business. We would like a financial expert to guide us on our venture.