Strategies for Determining Business Market Value
As you prepare for your next step—whether it’s financing your retirement with a business sale or graduating to your next business venture—a premium sale price can help you make your dreams for the future a reality.
Too often, however, owners have unrealistic assumptions about the value of their business. They allow their emotions about the company, the work they’ve put in, and their needs for retirement color their perceptions. That’s why it’s so important to have an objective strategy for valuing your business. There are a number of options for assessing what your company is truly worth:
- Assign a value to your assets. For many companies, their key value is their property, including intellectual property. Subtract any liabilities or debts. Then use this figure as a starting point for assessing your company’s worth. Keep in mind that most well-run businesses are worth more than assets, so this method works best if you have little revenue and do not have a competitive team in place running your company.
- Look at revenue. How much does your company earn in annual sales? Compare this figure to how much an industry competitor might be worth for a specific level of sales. It might, for instance, be about triple sales.
- Determine an earnings multiple. A better measure often uses the company’s earnings to develop a price-to-earnings ratio. Determine the likely earnings over the next few years. If a typical P/E ratio in your industry is 15, then your company’s value is 15 times its annual average revenue.
- Use a discounted cash flow analysis. This complex approach looks at annual cash flow, projects it into the future, then discounts that value to arrive at a net present value calculation. Many companies offer online calculators to help people who want to use this method.
- Look beyond simple formulas. Don’t just crunch numbers or use formulas. Look at geographic location as a source of value, then consider how your company might help a new owner realize its strategic goals, particularly if there are valuable business synergies.
About KAL Capital Markets:
KAL Capital Markets is an aerospace investment banking company advising middle market clients on mergers, acquisitions, and accessing the capital markets. The firm’s professionals have an exceptional track record, rooted in deep relationships and experience within aerospace & defense manufacturing and aftermarket services sectors. For additional information, please visit https://kalcapital.wpengine.com/.