When valuing a company, many business owners think that what they need to consider is how much money the company is making. This couldn’t be further from the truth!
With several factors that can affect the value of a company, it’s important that a business owner understands what is involved in order to get an accurate valuation.
This blog post will breakdown these factors so you can be better prepared when hiring your next business valuation expert.
Valuing a company based on its earnings.
Many business owners don’t know what their business is worth, this approach neglects cash and non-operating assets such as the value of any real estate or intellectual property owned by the company.
The one option used could be to compare other companies in your industry to see the average ratio of earnings vs assets. With a lower-than-average ratio, your company is not as profitable compared to others within your industry, this might be due to accounting errors.
Market Fluctuations
Forgetting about the fluctuations in the market, if your company relies on large amounts of external funding for its operations then this will decrease the value. Therefore, always factor in the cost of capital, this is a measurement of how expensive it would be when you borrow money from an investor.
Book Value vs Company assets
Another mistake that business owners make is to assume that their book value of the company’s assets is equal to the current market value. When estimating a fair price of the company, it's important to look how much revenue they generate and what their margins are like.
These are internal factors that are considered in the calculation of the value, keep in mind the external factors that play a role as well, such as competition or government regulations.
At the end of the day, it depends on the industry your company operates within.
Intangible Factors
Intangible assets are defined as goodwill or the reputation of your products/service, it may also include any patents or trademarks obtained by the company, which allow efficient operations compared to the competitors in the market.
Customer loyalty is determined by the continuation of purchasing from your company even during poor economic times.
The value on intangibles can be difficult to determine, but no the less they are still important and should be taken into consideration if you want an accurate value of your business.
Potential Risks
Lastly, which many of us do is to ignore the potential risks that are involved and affect the valuing of a company, such as changes in regulations or competition. It's important to know how your products or services are going to be impacted by these risks, as this will impact the value immensely.
These factors all effect the worth of your company in some way over time as the market conditions are ever changing, so it's important you have a clear understanding and take everything into account so you are prepared, if you are unsure of where to begin and how finding the true value of your company is an essential tool to have and the best way to get the result you require is by a business valuation.
A business valuation is a process of determining the economic value of your business/company, our valuation services are tailored to your business related needs no matter how big or small, new, or established your business is, we ensure our business valuers are qualified professionals with extensive industry knowledge and will guarantee a comprehensive detailed report of your company meeting all your requirements and help with any informed decisions you may have.