Are you wondering how to estimate the value of a business?
Whether you’re in the market to acquire or you’re thinking about selling a venture you built up, it’s good to know what factors into the value.
Without doing some research, you might overpay for a business that touts things that don’t matter. Or you might let your side-hustle-turned-full-time venture go for less than it’s worth.
Here are some things to look for when you estimate the value of your company.
There Is No One Rule
It’s important to understand that when it comes to selling a business, there is no one rule or formula. There are some common formulas that buyers and sellers will use, but they aren’t perfect.
For example, some formulas rely on an SDE multiplier to estimate the value. This looks at the size of the market you’re in to help give you a fair and reasonable estimate.
However, if your business is run online, this type of multiplier may not apply. Still, negotiators may try to use it to tell you how much they are offering is fair.
Do your research and explore several calculations before buying or selling. It may also help to consult an expert.
Stage of Growth
The dawn of startups and tech companies made evaluating businesses more tricky. That’s because companies that had never sold anything yet could be slapped with a six, seven, or even eight-figure price tag.
That’s why the stage of growth is one area you have to consider when selling or buying a company. There’s a major difference in value between a startup, a company with a viable product that’s on the way to market, and a business that’s been selling goods or services for years.
The stage of growth your company is in will also determine the type of people who may be interested in buying. For example, startups tend to be funded or purchased by angel investors. Tried-and-true service companies tend to be bought up by larger competition in the market.
The tangible assets in your business are the most cut-and-dry aspect of an evaluation. Physical goods you own have a market value attached to them, meaning you can quickly add up the rough value of all the items you own to run your company.
For example, machinery used in a construction company can easily be valued. If you own $50,000 worth of equipment, that factors into your total price.
Items like owned real estate and on-hand inventory also factor in. So start by getting a rough estimate of all your tangible goods—or asking the person you’re considering purchasing from for one.
Intangible assets can be more complicated, but often are the reason price evaluations go through the roof. In some cases, they could make a business less valuable, too.
Intangible examples include, but aren’t limited to:
- Brand name
- Trademarks, patents, and copyrights
- Customer lists
- Network of referrals
For example, if your brand is highly regarded in a community, you might be able to get more for a business. Or if you have a track record with hundreds of customers who have a history of doing repeat business. That could drive the price up, too.
Accrued debt on your business is an important aspect of figuring out how to estimate the value of a business. Extreme debt can cancel out large portions of a company’s attractiveness and maybe even detract certain buyers from continuing.
Debt often comes into play with the physical goods you have on hand. If you rent or lease equipment, you don’t technically own it. This means you can’t use it as part of the evaluation.
So, if you’re trying to figure out how to estimate the fair market value of a business, subtract the debt from your physical goods total. This number will give you a more accurate representation.
Size of the Market
Large markets tend to drive the prices up on a business. Niche services can, but won’t always, lower the price or reduce the number of interested parties.
Big industries like healthcare, technology, logistics, and manufacturing all offer large markets. However, these are also notoriously competitive places to market and sell goods or services.
In some cases, a small market that’s been cornered could actually drive the estimate up. As the business owner, you need to prove how much of the market you have squared away and what percentage are repeat customers.
Similar to the home buying process, comparables (or “comps”) can help you get a reasonable estimate on the worth of a company.
Buyers and sellers look at comparable businesses sold in the last 3 to 5 years. They assess the price the company was sold for, the market share, and other factors that go into determining the final price tag.
While comps give you good information, they shouldn’t be taken at face value. Dig deep into the numbers to make sure the business is similar to yours. Otherwise, you might undervalue your company.
Gaining data from more than one comparable business is best for all parties. This helps offset anomalies and may give you a more reasonable estimate.
How to Estimate the Value of a Business
We hope this helped you understand how to estimate the value of a business.
While there is no hard and fast rule, things like the stage of growth, tangible goods, intangible value, debt, and comps all factor into your evaluation.
The business of buying and selling companies can be challenging. If it’s your first time or you want some assistance, it isn’t a bad idea to work with someone with experience.
Schedule a consultation today to see how we can help you meet your goals.