When you have put all of your time, energy, and money into building a business you might decide there is a point when you want to liquidate the asset and enjoy some of the cash rewards or move onto something new.
Using a business valuation calculator is a useful way of working out how much your business is worth in no time at all, and it also helps to understand how you set about valuing a business.
Different ways to arrive at the right figure
The first point to bear in mind is that there is no specific formula used to calculate the value of a business and there is more than one way to determine what your company is worth.
A simplistic method would be to just tally the value of the assets by working out everything owned by the business that has a worth, such as equipment and stock, before deducting what you owe in terms of debts and liabilities.
However, that is far too rudimentary as an instrument for valuing a business and your balance sheet is more a starting point rather than a reliable indication of its worth.
The reality is likely to be that your business is worth far more than its net assets alone, and there are other factors to consider such as what sort of future revenue and earnings you can expect to receive that will boost the valuation.
Basing your valuation on earnings
A popular valuation formula is to use earnings multiples.
This is often referred to as the P/E ratio, which is the price-to-earnings ratio. This is a calculation that aims to estimate the anticipated earnings of the company over the next couple of years.
If your business enjoys stable revenues and demonstrates growth, this is a relevant method as it is a way of working out what your business is really worth to a buyer. If your earnings are around $150K per year, for instance, and the calculated P/E ratio is 15, that would value your business at $1.5M.
This valuation figure could be much higher than the net assets you have in the business.
As you can see, it can be a complicated process arriving at a realistic and accurate valuation and in addition to working all the numbers and formulas at your disposal, it also pays to consider other factors that go beyond methods of calculation.
Another relevant factor that would influence the valuation would be strategic value, for example, which is based on what your business could be worth to a potential buyer if there is potential for synergy to strengthen market penetration.
It is a good idea to use a calculator that will prompt you for the numbers required to get an accurate estimate, but it also often pays to use that information in order to seek professional guidance on how to maximize the value and get the right amount of cash your business is really worth