How to Evaluate the Worth of a Business

Valuing the worth of a business is accomplished by valuing all the assets it holds. These assets are then compared against debts, which will produce the net business worth. A business is often worth more than the sum of its parts. This is due to intangible assets such as brand and human capital. It is for this reason that businesses must be valued by looking at valuations based on both comparison (market) and asset (book) values.

Instructions

1. Review the balance sheet. The balance sheet equation is assets plus liabilities equals stockholder's equity. Any profit left over from the sale of assets to pay back debt is distributed to the stockholders.

2. Determine the value of current business assets. Include equipment and inventory. These assets should be valued at replacement costs.

3. Subtract total liabilities, including loans, accounts payable and operating leases from the replacement costs for total assets. This is the book value of the business, but that does not take the market into consideration.

4. Determine the revenue multiple. This multiple depends on the industry. For instance, a company can sell for three to four times annual sales. Sales multiples are generally found in investment analysts reports. Multiply this multiple by the sales in your company for a business value based on current revenues. This will provide you with an average for comparison.

5. Determine earnings multiple. Revenues are important, but earnings are a sign of a good business model. Use earnings before interest and taxes (EBIT) as a measure for comparison. Earnings multiples can also be found in investment analyst reports. Multiply the earnings multiple by EBIT. This is the business worth based on current earnings.

6. Calculate discounted cash flows. This involves discounting the projected cash flows of the business back at a discounted rate. Analysts commonly use the long-term Treasury bill as the interest rate. You can perform this calculation in Excel or most any financial calculator using the net present value (NPV) formula.

7. Analyze your data. The business with the highest book value, revenue and earnings multiples and NPV is the business with the highest worth.

References

• Seven Things That Determine The Value of Business
• AllBusiness: How to Determine Business Value

Resources

• Read this Article in Spanish
• Business Valuation Calculator