How to Value Your Business: A Simple Guide

Whether your business is just starting, experiencing a growth spurt, or has already reached maturity- knowing your business's value provides valuable insights into its growth potential and financial health.

Understand Your Needs.

If you need a bank loan, the value of your business is a significant factor in determining how much you can borrow. Communicating the value of your business will help investors and stakeholders or help you sell your business. Most importantly, if you want to sell a portion of your business, knowing its worth will allow you to get a more beneficial price.

Calculate the Book Value

The book value of a business is the value determined by its books, accounts, and financial records.

●       Review income statements from the past 3-5 years. This will let you understand revenue and expense trends.

●       Calculate the value of your business’s physical assets such as property, equipment, inventory, and cash

●       Determine the value of liabilities such as loans, employee salaries, and taxes owed.

●       Subtract the total liabilities from the physical assets to determine the equity of your business

Know Your Cash Flow

Cash flow is the net amount of money entering and leaving a business. It's crucial for understanding a company's liquidity and financial health. It will provide insights into how efficient your operations are and whether your business is better equipped to handle unexpected expenses or economic downturns.

●       Identify all cash inflows: This includes revenue from sales, customer payments, investments, and loans.

●       Identify all cash outflows: Expenses like rent, salaries, taxes, and supplier payments.

●       Subtract total cash outflows from total cash inflows: The result is your net cash flow.

The Value of Intangible Assets

Intangible assets include factors such as the reputation of your company’s brand, any patents or trademarks it holds, or a loyal customer base. Knowing the value of intangible assets can allow your business to know:

●       The potential for future earnings

●       How your business compares with similar intangible assets in the marketplace

Enterprise Value:

●       Enterprise value adds debt to market capitalization and subtracts cash.

●       Provides a more complete picture by accounting for debt and cash, offering a clearer view of a company's total value.

EBITDA

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. This provides a clearer view of a company's core profitability from its ongoing operations, making it useful for comparing the performance of companies within the same industry or assessing a company's ability to generate cash flow. Here is a breakdown of each component:

●       Earnings: This refers to the company's operating earnings or profit.

●       Before Interest: Interest expenses are excluded from EBITDA because they can vary significantly based on a company's capital structure (how much debt vs. equity it has).

●       Taxes: Income taxes are excluded because tax rates vary widely between jurisdictions and can be influenced by non-operating factors.

●       Depreciation: This allocates the cost of tangible assets (like buildings or equipment) over their useful lives.

●       Amortization: This applies to intangible assets (like patents or trademarks) and represents the gradual write-off of their cost over time.

Remember, business valuation is a complex process that often requires professional expertise. By combining financial analysis with a clear understanding of your business's unique strengths and market position, you can develop a solid foundation for strategic planning and growth.

If you’re unsure how to determine the value of your business, John Howard can help!

At Alliant Capital Advisors, our brokers provide specialized expertise, market insights, and negotiation skills. This will increase the likelihood of achieving a fair and accurate opinion of value for your business.

Schedule a phone call with John, or call us to schedule a consultation. Let’s work together to determine what your business is worth and what steps to take next.