If your business is finally taking off, closely tracking your finances and business value is vital. It will ensure your business runs smoothly and lasts. Knowing your business’s value would help you get more capital from loans or shares. It would also give you a better idea of your business’s success. Deducting cost from revenue may not be enough at some point. It would be better to use proper valuation methods to determine your business’s worth.

Determine the value doesn’t have to be a huge struggle as there lots of ways to go about. Below are some valuation methods to help you achieve this

Source: Smith Schafer

1. Market Multiple Method

This strategy uses a firm’s enterprise value (EV) to find your business’s value. It assumes that similar firms have the same EV. Enterprise value is a broader alternative to market cap. It includes a company’s debt and its cash.

To start, you get the enterprise value:

Enterprise value= Market capitalisation+ outstanding debt- cash and cash equivalent

The market capitalisation is the total value of a company’s shares or stocks. You calculate this by multiplying the price of stocks by total outstanding shares.

After finding the enterprise value using the formular above, you calculate the market multiple thus:

Market multiple = Enterprise value/ Income metric

Income metric can be this different companies’ total sales, EBITDA, SDE depending on your preferred metric.

Now find the valuation of your company. Multiply the market multiple by your company’s income metric. This could be your EBITDA, SDE, or total sales as you may decide.

Business valuation = Market multiple * Income metric

Example

Say a similar company has a market Cap of $500M, the company has $10 M as cash and cash equivalent. Its total debt is 90m and its EBITDA is $60m

EV = 500 + 90 – 10

= $580m

To get the market multiple

Market multiple= 580/60

= 9.7

If your business EBITDA is $40m

The value of your business

= 9.7 * 40

= $388 m

2.    Adjusted Net Asset Method:

This valuation method uses your businesses asset and liabilities to determine the value of your business. First you determine all your business assets and adjust for its current price. For example, we adjust machineries for depreciation. But people use lands at their current price because they do not depreciate.

Next the businesses liabilities are listed. This would include mortgages, account payables and loans. All this would be adjusted to their fair market value.

The difference between the fair market value of the Assets and liabilities makes up the value of the business. The downside of this valuation method is that it does not consider a business’s revenue or future growth potential.

Source: Kayone Consulting

3. Discounted Cash flow method

This valuation method is an income-based valuation method which puts into account the future cashflow of the business.

Assuming Cashflow = C

And Discount rate = D

The formula for the Discounted cashflow for a 3-year forecast would be given as

DCF = C year1/ (1 + D) + C year2/ (1 + D)2 + C year3/ (1 + D)3

To get the Net cash value of the business you would have to minus the initial investment from the discounted cash flow

For example, if you have forecasted that in the next 3 years your business would make $25K, $50K, and $75K with an initial investment of 40k. Given a discount rate of 5%?

DCF= 25k/ (1 + 0.05) + 50k/ (1 + 0.05)2 + 75k/ (1 + 0.05)3

= 26.25k + 105k + 236.25k

DCF = $367.5k

To get the business value, you subtract the initial investment of 40K from the business value

Business value = 367.5k – 40k

= $327.5k

4. Multiples of earning Method

This valuation method is computed by calculating the business earnings with a many to get the value of the business. The multiples are based on factors like:

• Market risk
•  Location of the business
•  Business domain
• Company Assets
•  Age of the Business and Reputation.

The are various online sources that would help you find multiples for different businesses.

With you finding a multiple for your business, you would also need choose an earning metric to help you compute the value of your business. This earning metric could be EBITDA, revenue or net earnings.

To compute the value of your business: Business value = earning metric * Multiple

Example:

Assuming your business has a multiple of 10 and net earnings of $200,000. To calculate the business value, we would have

Business value = 200,000 * 10

= $2,000,000

5. Entry Cost

This is simple how much it would cost to set up a similar business as the one being valued. With this method, you factor in all it cost you to get the business to where it is now and their cost. this would include your tangible assets as well.

After this, note things you could have done differently to save more money. You can do this while starting the business and still make the same profit or more. Either starting in a new location or buying cheaper material. Calculate how much you could have saved and minus it from the initial cost. This would give you the entry cost and also value of your business.

Conclusion

The listed valuation methods would help you know your business’s value. They would also help you track growth over time. But before attempting them. It would be common to have your financial records ready. But if you keep detailed financial records of your business, it would not be hard to use any of these methods. They will help you get a proper valuation of your business.