Knowing the value of your business is important for the process of selling your business. Without a proper valuation, there is no way to know how to sell your business, or how to get maximum value. Estimating the value of your business can be difficult, especially if it is an online one.
In the lead up to the valuation and overall selling process, you will need to prepare all relevant business information. This will include everything from finances and legal information to business plans and even customer information. From there, you can decide on a valuation method.
The Discounted Cash Flow Method
A common method for a valuation is a Discounted Cash Flow (DCF). This method aims to calculate the intrinsic value of a business by estimating the money an investor would receive from an investment.
There are several variations of this method and the calculations can be slightly complex, but essentially, the value of a business is calculated by forecasting the future positive cash flow of the business. This number is then discounted based on the time value of money.
A Market Comparable
The industry your business is positioned in will greatly influence the value of your business. Brokers, like those at Digital Exits have a huge database of businesses for sale in a range of industries. By understanding the current marketplace of specific industries, they can effectively value similar businesses to that of the industry average.
This method is successful because the way businesses are valued often differs from industry to industry.
The Present To Future Value Method
Another way to value your business is to estimate the future profit of your business. One of the key things buyers look for are future growth and profit. If sellers can prove to buyers that the business is in a state of steady growth and will be profitable in the future, they are much more likely to sell their business for maximum value. This is why keeping all your businesses financials clean is important.
This valuation method is calculated through looking at trends and patterns related to average sales profit and the growth percentage.
Business Assets
Otherwise known as the liquidation value, this method sees you calculate all your business assets. When doing this all assets, tangible and intangible, must be included. Add all assets, fixtures, inventory, accounts receivable, and equipment, and then subtract your loans, accounts payable and lines of credit. This process only give you your current value and it’s a basic figure at that.
Things that come under business goodwill, like your business reputation, brand, customer loyalty and staff performance can all affect your valuation but their impact is hard to calculate. Therefore, this is only an indication of value.
Recreate Your Business
Calculating the cost of creating your business from the ground up can be a way to value your business, or at least a finding a benchmark for the value. While doing this it’s important to consider your industry and its current landscape. Things to consider when calculating the cost includes stock, equipment, licenses and permits, recruiting, training and employment, product development, marketing and so on.
Rule Of Thumb For Online Business Valuation
This method is extremely basic and is generally used for quick, estimated appraisals. It provides a quick value, but doesn’t include a lot of things which will certainly have an impact.
This simple method is worked out by taking the yearly positive cash flow and multiplying it by two to four. The amount will depend on your industry trends.
These ways of valuing your business will help you begin to understand your businesses worth, an important aspect of selling. Of course, a valuation is a complex and involved process which is best carried out by a professional advisor or broker, though understanding the basics will help you prepare your business for its evaluation.
I hope you enjoyed this article about how much your online business is worth and how to calculate valuation.
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