How to value a business – Complete guide for beginners
Know how to value a business if you are interested in investing; or even if you are thinking about selling shares in your company. These data will be of great help when making a good business and economic treatment.
The business needs that we sometimes have make us think of wanting more; mainly when success has been a path that has become very attractive; and in a lifestyle that you simply can not stop enjoying. For this same reason, many entrepreneurs want to know how to value a business ; either to invest in a new one, or to sell one’s own.
It is true that the circumstance of life sometimes encourages us to grasp new goals or leave our plans aside; whatever the reason for the interest in knowing how to value a business ; It is recommended that you have an interest in this type of issues; because at any time you could take advantage of this information.
It is necessary to know that there are many ways to value a business and the reality is that it does not exist as such a correct way to do it; because the business is worth what you think it is worth, depending clearly, the criteria you have established. However to have a more successful amount; There are several ways to know how to value a business and thus see reflected the estimate of the final value that suits you.
To begin with the valuation of the business one must look at the value of the assets of the company; Here several aspects are taken into account: What does the business do? How many people make up your team? What is the current inventory of the company? The answer to these questions are important because if you buy or replace all these points; another great investment will be necessary.
It will be observed in a good indication of the value of the assets of said company; and if the company you are interested in does not have good signs of these; then think twice before making the purchase; since this decision will directly interfere with your economy. Find out before buying, as sometimes current owners may not know if the business is exactly profitable or not.
It is an excellent idea to make an investment in companies if you already have the knowledge of how to manage one; Well, if the organization that you want to acquire is done correctly; the benefits obtained can be really substantial. The question is to know how to value a business that is for sale; or failing that, have the information of the value of the company itself.
Consistently you can see many entrepreneurs who put their businesses up for sale; This is due to several factors, it may be that the owner of the business retires and that there are no heirs before it; Or, there may simply not be people interested in running the company. Given this situation, it is normal for the business or the company to be put up for sale.
This type of actions generate that the interested ones take the time to investigate the necessary information on how to value a business ; for, in effect, each of these have different representations of value; that is, there is a difference between individual companies and commercial companies that must be known in order to have a clearer value of a company.
These types of companies are those that are handled by a natural person in a habitual, personal, direct and on their own; his legal personality is the same as that of the employer; so there is no real difference between the commercial heritage and civil heritage.
Regularly they are usually those where you have an absolutely flexible way of operating; so the beginning or closing of the company is usually a simple and fast situation. The creation of this type of company is usually done when it is not clear that the business will be sustainable; however much this is desired, or when the services to be provided are sporadic; and the benefit obtained from these does not require the formation of a Mercantile Company.
Individual companies are then those in which the owners or owners are one person; therefore this is the only one that benefits from the profits of the activity that is produced by the company; So this shows that you do not have any kind of association with other people or beneficiaries.
The fact of being a self-employed and independent worker means that you are not subject to an employment contract; therefore the activity carried out personally is for profit; although eventually the services of other people are required to be able to perform certain requested jobs.
Also called as a commercial company, aims to perform acts of commerce or good; an activity that is subject to commercial law. To this type of companies the law recognizes them as their own legal entity and distinct from their members; They have their own assets and channel both their efforts and their work in a lucrative purpose that tends to be common.
Then, just to have a little clearer of what a mercantile society means; are those that have a contract between two or more people where certain characteristics and benefits in common are stipulated; so that in this way the benefits that are obtained; be distributed among each one that makes it up.
If, for example, you are thinking about acquiring or selling part of a consolidated company for more than one person; then this means that it is a Mercantile Society, so knowing how to value a business of this nature is a subject of great interest; especially for those people who are interested in acquiring a new one to extend their own; or, for those who want to sell part of their company.
How to value a business?
The first thing that must be done to know how to value a business , is to collect information about it. It is advisable to have the law of supply and demand as a starting point; that is, look around the business and investigate the sale price of others that are similar to the interested party; This is going to be that you get a general idea of how much the business could be worth.
After this, the assets must be examined, why? This point is just as important as knowing the estimated price of the business; knowing the assets available will help to know more accurately how much that company is worth. For this examination we have two ways:
1) Create an inventory: it is necessary to have a comprehensive inventory of all the tangible goods that are counted; It is a correct way to get the liquidation value accurately. It refers to tangible goods such as furniture, equipment, articles, products, etc.; that could be part of the company’s operations.
2) Capitalization of income: this method assumes that the business will continue operating after the sale is made; therefore, future income is taken into account, which is generally based on the performance obtained with the actions carried out in the previous business. It is always advisable to have financial records in order to correctly calculate the capitalization of income.
Make an estimate of cash flow
When you are an entrepreneur, knowing the flow of money is a task that is carried out frequently; So in effect, this step is something that must be done if you are thinking about both selling and buying a company more. To do so, there is currently a formula that many companies use regularly; the so-called ” Seller’s discretionary cash flow” or in English ” Seller’s Discretionary Cash Flow “.
It is important to know that this model usually only serves for businesses run by an owner or operator; There are regularly small businesses and some franchise accounts. But for those businesses that tend to be bigger; Although the evaluation is usually more complex, it has a fairly simple formula:
To know how to value a business of this type with this formula; profits must be taken into account and taxes excluded. Subsequently you must add the expenses that are not originated by operating costs; and subtract those revenues that are not generated by the business operations.
Then the outliers and the one-time expenses must be added; You should also subtract those expenses that equally occur once. To all this must be added the expenses that come from amortization or devaluation; and the payments and interest expenses, however, should be subtracted the income that comes from the interest.
The owner’s total compensation must be added; In case there are several owners, you should choose only one. Then adjust the compensation of all other people who are owners; this will originate another estimate with real financial bases of the acquired profits of the business.
Check the whole process
It is important for you to know how to value a business correctly; everything related to it is taken into account; from every peso or coin that enters, as well as those that come out; even those expenses or profits that are not registered financially. This is very important whether you are the buyer or the seller of a business property.
It is known that being methodical is not an easy task, but it is essential when you are an entrepreneur; no matter how tedious it is, it is advisable to always make a list of both the income and the expenses of the company; because they are strong data that will be of great help when it comes to wanting to acquire another company; or at the time you decide to put on sale the one you already have.
The clear money that is important, but for this type of cases; especially for those where you are looking to buy to expand a company; or to simply have another one; Money must stop being the most important thing. It is necessary to think beyond this one; The location, reputation and even the age of the business should be considered first. For it is the factors that have the power to alter the value of the cash flow.
Remember that there are several things that can increase or decrease the amount of money of the company. So applying the knowledge of the difference between cash and credit will be a great help to investment.
If for example:
The seller intends to make the sale in cash, it is logical that in the end, a lower figure is obtained than what was estimated; that is the benefit of financing in these cases. In case of making the purchase or sale on credit; they should be aware of how payments are balanced, otherwise; There could be a mismatch in finance.