How to Calculate Company Value
Whether you are thinking of selling up and moving on to something new or simply want an idea of how much your company is worth, you need to know how to value your business—with something so important, guesswork simply won’t cut it.
If you are selling, you need to know that you are embarking upon a lengthy process that can be difficult and stressful.
Your first step, however, needs to be determining a fair and accurate company value that reflects the work you have put in, all its assets, customers, and its market position, among other things. Don’t be too sentimental, however; buyers are not typically sentimental, and they don’t care about how much the company is worth to you personally—it’s all about commercial value.
To that end, don’t start out by expecting your business to sell for an outlandish amount, however, never let it go for less money than it is worth.
Calculating Company Value: Where to Start?
Determining a realistic company value, and therefore its price if you are selling up, is something you should do if you haven’t already, and you should revisit it often.
There are several different ways that experts approach the calculation of company value. Typically, they will look at two things:
- Tangible assets; and
- Intangible elements (perceived value).
Another common way this is done, however, is to look at earnings multiples—this is a formula that values a company based on a multiple of its net profits, the price over earnings ratio that represents company value by dividing the business value by post-tax profits.
Usually, accountants can do this for you.
This method can be confusing, though—certain industries such as technology have a higher ratio than other brick-and-mortar businesses like retail companies.
4 Other Ways to Determine Company Value
Earnings multiples is complicated, and we recommend consulting an accountant to do this for you—you should have an accountant, it’s good financial practice—but there are other things you can look at to figure out your company’s value, too.
1. Base calculations on your revenues
How much does your company generate annually in sales? This is obviously a great place to start. After all, it is your sales that make your company’s money.
Calculate your annual revenue and then determine, either by contacting a business broker or stockbroker, how much a typical or average business within your industry might be worth for a similar level of sales.
Industries differ—in one, company value may be two times annual sales whereas in another it may only be half annual sales.
2. Tally your asset value
Your business probably owns a whole lot of assets. Whether it’s physical brick-and-mortar locations, stock, materials, or proprietary software, it all adds up and contributes toward your total value of assets.
Look at everything your business owns and begin to add up the value of it all. After you have done this, take away from the total any liabilities or debts your company may have. This is known as a business balance sheet (value of assets minus liabilities) and this is a great starting point for figuring out company value.
Your business is probably worth more than its asset value alone, however. For instance, we just looked at annual revenues—these together make up the bulk of your value.
3. Use earnings multiples
If you really want an accurate figure, then you will need to use earnings multiples we mentioned earlier. Estimate the earnings of your company for the next few (at least 3) years and find out what the typical price-to-earnings ratio is within your industry and then multiply them together.
For example, if your industry’s typical P/E ratio is 10 and your projected earnings per year are $100,000, your business would be worth $1 million.
4. Look beyond the financials
Don’t just base your company’s value on your finances and numbers.
Consider, for example, other factors such as your geographical location, any proprietary secrets, software, patents, or unique products, etc., that your company owns. In addition, consider how strategic and beneficial it would be for another company to acquire yours if there are synergies between you and those who may be interested in buying you out.