As a business owner, you pour your heart and soul into building and growing your venture. Whether you have plans to sell your business, seek external financing, or simply have a grasp of its worth, understanding how to value your business is very important.
Understanding and determining a valuation for your business allows you to make informed decisions about its future.
In this article, we will explore the main reasons for business valuation, the most-used valuation methods, and share valuable tips to maximize valuation.
Why Do You Need To Value Your Business?
The Main Valuation Methods
Multiple methods can be used to value businesses. The choice of method depends on factors such as the size and nature of the business, its industry, and the availability of financial information.
We will present below three widely used valuation methods. However, before we do so, it is important to keep these points below in mind when valuing your business:
There is a difference between the Enterprise Value and the Equity Value. Simply put, we have: Equity value = Enterprise Value – total debt + cash. We will be focusing on the Enterprise Value in this article to remove the capital structure from the equation.
There is a difference between the Valuation and the Price. The Value is the amount - or more appropriately the range - that is obtained by using a method and that is the reflection of what a buyer should pay for a company. The Price of a company is the amount for which two independent parties agree to carry out a sale and purchase transaction, which is fixed during the negotiation process.
There will be adjustments made to the Financial Statements. This is to reflect more accurately the actual profitability or cash flow potential of the company. These adjustments include errors made in the recordings but also some normalization adjustments on Non-recurring expense, Owner’s Compensation, Related party transactions, etc.
1. Market-based Approach with the Multiples
Tips To Maximize Valuation
Now that we understand the importance of valuing your business and the main methods to determine its worth, here are some tips to maximize your business's valuation:
1. Strengthen Financial Records
Maintaining accurate and up-to-date financial records is crucial. Clear and transparent financial statements provide potential buyers or investors with a comprehensive view of your business's performance, profitability, and growth potential. You can learn more about Financial Reports in a previous article here.
Also being able to present your figures in detail with analytical reports and projections that are relevant for your business is a big plus. You may want to showcase your performance per activity, per types of clients, per locations, etc. Here is one of our previous article on management and segmentation reporting.
2. Focus on Profitability and Growth
Demonstrating consistent profitability and a strong growth trajectory significantly enhances your business's value. Implement strategies that optimize revenue streams, manage costs, and foster sustainable growth.
3. Build a Strong Management Team
A capable and experienced management team instills confidence in potential buyers or investors. Surround yourself with talented individuals who possess the skills and expertise necessary to drive the business forward.
4. Diversify Your Customer Base
Overreliance on a few key customers can be viewed as a risk by potential buyers or investors. Seek opportunities to diversify your customer base.
Proseso Consulting - The Finance expert for growing and international businesses
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Proseso Consulting provides business advisory and finances managed services (bookkeeping and accounting, outsourced and automated payroll, tax compliance, financial reporting, etc.). We are here to help you achieve your long-term business goals!
Ninoy Salmon is a seasoned business and finance professional with extensive experience working with both fast-growing startups and companies in the Philippines and around the world.
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This blog article does not constitute professional or legal advice. It is only intended to provide general information on a subject.