How to determine the value of a Business
Mergers, debt financing, stock market listing and estate planning are some of the reasons for estimating the value of a business. The common business valuation methods are discounted cash flow analysis, book value calculation and comparable company analysis. Use one of these methods to get a rough estimate of your company's value before you consider hiring the services of a professional business appraiser.
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Instructions
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Gather relevant data, including prior-period audited financial statements and a list of assets and liabilities. Compile a list of comparable publicly traded companies. Collect information on recently completed merger transactions involving comparable companies. Get a list of business appraisers from your local business directory or from the American Society of Appraisers.
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Estimate the value of a business using discounted cash flow analysis. The value is equal to the sum of annual cash flows in year "T" divided by 1 plus a discount rate, raised to the power of "T." If you assume that the business will generate the same annual cash flow into the future, the business value is equal to the cash flow divided by the discount rate. If you assume a constantly growing cash flow, the business value is equal to the cash flow in a year zero divided by the discount rate minus the constant cash flow growth rate.
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Get the book value, which is equal to tangible assets minus total liabilities. Total assets minus intangible assets equal tangible assets. Intangible assets refer to goodwill, patents and similar items without easily available market values. The book value is the theoretical liquidation value of a company.
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Use industry rule-of-thumb valuation ratios. According to a business valuation article posted on the Stanford University Development Research website, use industry valuation ranges from BizStats to estimate the value of a company. BizStats adapts its data from "The Business Reference Guide," published by Business Brokerage Press. For example, if you own a dry cleaning business, the valuation rule-of-thumb at the time of publication was 70 percent of annual sales plus the value of inventory. For a law practice, it was 40 to 100 percent of annual revenues.
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Determine the value of a company by comparing it to a similar publicly traded company. The market capitalization of a public company is equal to its share price multiplied by the number of outstanding shares. If your sales are half of a comparable public company, your business is worth approximately half of the public company's market capitalization. Jeremy Quittner of "Bloomberg Businessweek" cautions that this method does not factor in the cost of borrowing, risk factors associated with small companies, management team experience and differences in operating efficiencies.
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Tips & Warnings
Macroeconomic trends, location, long-term industry prospects, regulatory environment and the availability of qualified people are some of the other factors in business valuation.
