Working out how much your business worth is not just a vanity question. Knowing what your business is worth will come in handy when you are planning to sell your business, on-boarding new equity partners into the business or looking for a line of credit. From a business a strategy point of view, knowing the worth of your business also gives you an indication on where you stand in the industry and that can guide your future expansion strategy.
Because building a viable and profitable business is difficult, every entrepreneur generally has an inflated sense of what their business is worth. As an entrepreneur, you will not just be factoring in your assets and liabilities but the sweat and tears it has taken to build a business over years. A potential buyer, on the other hand, will only be interested in the balance sheet. The fact is that most buyers will not always see the same value that you see in your business. This is probably because both of you are looking at the business from a different lens and as a founder, you will likely be having an emotional attachment to the enterprise.
There is so much that is factored in when calculating the worth of a business. These will include factors such as the past cash flow, profits, assets, liabilities, risks in running the business, the circumstances of the sale among others. There are factors that may be of great importance of you but which would be hard to measure when calculating the worth of a business. These include the goodwill and the business relationships that you have built over the years. The brand equity of the business is key although it is of abstract value.
Revenue Traction as a Basis for Business Worth
This is the most reliable methodology for arriving at a business value. The business owner can contract a professional accounting firm Melbourne offers that can pour over the books and create a comprehensive financial profile of the business.
The most accurate business valuation will be based on your financial information over an extended period of time. Collating and analyzing this will involve significant work that is best outsourced to a professional accountant Melbourne practice. These companies will work with an array of business information in order to accurately calculate your revenues and profits. These include the following:-
- Financial statements: These should stretch for at least five years to give buyer a reliable sample of revenue traction. You will need documents that show debts, annual business turnover, profit and loss statements, and cash flow statements.
- Physical assets: Give details of all the physical assets owned by the business such as stock, equipment and machinery.
- Other assets: These include other intangible business assets such as intellectual property rights, patents, goodwill and business relationships among others.
A business can also be valuated from its tangible assets. From your business and financial information, it is possible for a professional accounting firm Melbourne has to carry out an asset valuation for your business. Asset valuation simply involves getting the sum of all assets and then subtracting the liabilities. For example, if the business has assets worth $400,000 in terms of machinery equipment and debts worth $50,000, then it has an asset value of $350,000. There are buyers who might just be interested in buying the business assets while leaving the liabilities such as tax payments and outstanding debts to the previous owner.
Price Earnings Ratio (P/E Ratio)
If the business is listed in the stock market, then you can use the P/E ratio to calculate its worth. The P/E ratio refers to the business value divided by the profits the business makes after tax. For example, if the share price for the business is $20 and the earnings per share after tax is $4, then the earnings per share will be $20/$4 which is equal to 5. To calculate the value of the business, you simply multiply its most recent net profits by its P/E ratio.
But you don’t have to sweat it. There are lots of reputable public accounting firms Melbourne that can do the heavy lifting for you and help you figure out the true value of your business.