Have you ever wondered just how much money your business is worth? This might be a question you ponder out of plain curiosity or because you have an interest in selling your business. Whatever the case, there is no simple formula for determining the value of your business, but you can use the following questions to guide you in determining the value of your business.
What does the business own?
Take a look at the assets, inventory and equipment that are part of the business. These are important entities that contribute significant value to your business. At bare minimum, the amount invested in office supplies, special equipment, property, and inventory makes up a core percentage of the value of your business. Make sure to factor in depreciation for items like computers and company vehicles that need to be updated or replaced regularly. Also consider practical items like shelving units and displays, which are integral to business functions, but not necessarily high dollar items. In total, all of the little pieces of equipment and inventory that your business has may add up to much more than you could imagine.
What are the yearly revenue stream and profits?
In addition to the physical property of the business, the yearly revenue stream is the next factor in determining its value. While revenue is only a crude approximation of how much a business is worth, it is an important indicator of the viability of the business. The other critical number is how much profit the business generates yearly. Comparing the revenue stream against the profits often generates a more realistic projection of what your business is worth in terms of dollars and cents. Generally speaking, an average business is “worth” three to six times its annual cash flow.
What is the outlook for the future?
The final factor to consider when determining how much your business is worth is the outlook for the future. In the event that declining revenues and profits have left your business flailing, your business clearly will not have the same kind of value as one that is thriving and growing. By examining records for the past five years, as well as economic predictions for the future, you can develop a better understanding of how much your business is worth.