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A business valuation is a procedure that estimates the monetary value of an organization. It is important to report financial information and other reasons like dispersing shares, selling your business or some of it, establishing succession plans, and obtaining financing.
The value of a business can be determined by assets, earnings or market potential. The most common methods of measuring the value of a company are the times-revenue or earnings-multiples method and the discounted cash flow (DCF) technique.
The times-revenue or earnings-multiples method multiply your business’s earnings or revenue by an industry standard multiple to determine a value. This is a good way of estimating the value of your company, but it doesn’t necessarily provide an accurate picture. A cafe that earns $250k per year, and is valued at five times the amount, may be worth more if it’s got an established brand or top-quality dining experience.
The formula for book value is another popular method. This method takes the total value of your assets, such as equipment, real estate, and inventory and subtracts liabilities that are outstanding debts and loans. This method is fast and simple, however it might not reflect the true worth of your business, especially when you’re looking at growth potential. Investors and buyers tend to be more concerned about your future earnings than the assets you currently have. This is why it’s recommended to run a full valuation, for example by an appraiser for businesses or a broker before pursuing investment from outside.