If you are a small business owner, the time may come when you need to conduct a business valuation analysis. It may surprise you to learn that the final business valuation is not an absolute. The results you get from your analysis are very much dependent on the reasons you are looking to have the valuation done. Two of the key factors that need to be considered are the reasons you are doing the analysis and how you look at the value of your business. These are often referred to, formally, as the premise of value and the standard of value. Many people are not sure how to value a company because they have never been in the position to so such an analysis.
5 Methods for How to Value a Company:
- Look at multiples of your EBITDA. The EBITDA stands for your “earnings before interest, taxes, depreciation and amortization.” Many investors look at a company and determine its value by the EBITDA value. They take that number and multiply it by a set number. Say, they look at your EBITDA and think that your business is worth three times that amount, the method they use will to look at the business valuation for your company is to just multiple the EBITDA number by three.
- How much has your revenue grown? When looking at how to value a company, looking at the growth in value is a natural thing to do. You know that, over time, you have seen a lot of growth in your company’s revenue. If this was not the case, you would not be in the position to look to small business valuation services in the first place. The question is not, has your company’s revenue but how much has your business revenue grown? You may have seen some great growth for your revenue but you should also know that when investors look at that, they may assume that the growth rate going forward is not going to be as robust.
- What is your margin for your EBITDA? If you take your EBITDA and divide it by your revenue, you will have the value of your EBITDA margin. When you look at how to value a company, the EBITDA plays a big role. Businesses are often valued by using a multiple of the EBITDA amount so if you can increase your EBITDA margin, you will do your business a big solid and increase its value. This will only improve the value of your business and help with investors you want to talk to.
- Assess your leverage situation. Most investors will finance the acquisition of a new business with debt of their own. You should consider this when you are negotiating with those investors. The cash flow from your business can be used to service the new debt that is incurred by purchasing it. You should use this leverage in determining the price of your company.
- How much of the company are you selling? You need to decide and work on how much of your company you are actually selling to investors. This will make a big difference in how much money you receive but also has other implications for you. In terms of what you can expect to receive from the sale of your company, if they buy 80%, the way it will work is that they will pay you for the value of the business and then you will purchase back 20%. You will make that purchase with the same conditions that were put in place to sell that 80% to the investor.
There are some other things you can do for this process. As you probably know, the small business valuation analysis process is very much an economic exercise. If you wonder how to value a company, you should know that investors require a lot of your financial data. Before you begin the process, you should take the time to get all of your financial records in order. For many small businesses, experts recommend compiling at least between three and five years of financial data. This may not be possible for startup companies so you should just put together the data you can.