Determining Your Business’s Market Value

by Josh Biggs in Business on 22nd May 2021

Interested in buying or selling a business? If so, it’s important to keep in mind that the market value of a business will be the reason you decide to buy or sell it. This also applies to the potential investor looking to invest in a business. The market value or business valuation will determine whether it is worth the investment. Consulting with business brokers can help instill buyer and seller confidence when determining a business’s market value.

Valuate Company Assets

Every company has physical and digital assets that give it its value in the marketplace. Physical assets may include real estate, fleet vehicles, equipment, product inventory, including geographical locations. Digital assets are often in the form of intellectual property such as proprietary software, company branding, marketing materials, patents, and data just to name a few. Adding up the value of these assets is a starting point for determining how much a business is worth. It is also these assets that generate the company’s revenue and earnings, which are two important criteria investors and individuals looking to buy a business examine before making a final decision.  

Calculate Revenue

What also contributes to calculating your business’s market value is documenting the yearly revenue of the business. For a more detailed valuation, this can be done on a quarterly basis to examine the consistency and identify areas of improvement. A very common question most buyers ask is, how much does the business generate in sales annually? It’s imperative to have this information ready to present in an annual earnings report for review.

Earnings Estimation

Even the CEO of a business must know how much their business made in the past year to inform investors and business partners. It is recommended to calculate the net revenue of your business to give an exact estimation of how much a business is making in profit after all other expenses are paid. Yearly earnings is a business valuation criteria most buyers and investors like to examine in their decision-making process before they buy a company. 

Calculate Cash Flow

The performance of a business is usually evaluated by the amount of cash flow that it generates every month by selling its products and services. This is especially important when looking at the long-term financial health of a business. If a business is holding a consistent cash flow stream every month, that is a good indication that the business will continue to keep pace and will give investors and buyers the confidence they need to acquire the business at a certain percentage or even the entire business. 

Geographical Leverage

Sales numbers are very important and so are yearly earnings, but the value of a business is also evaluated by the real estate or geographical locations that it’s conducting business in. The land that a business owns has a strategic value that can contribute to the market value of a company as a whole. This follows a logical process, the more land a business owns, the more the business is going to be worth. For a would-be-acquirer of a business, the geographical coverage of a business is also equally important for market valuations.

Categories: Business