How to Effectively Measure the Value of Your Company

If you’re a business-owner, one of the first things you’ll want to do is determine the value of your company. As with anything in life, many people disagree over the best method to do this. There are many courses on offer from providers such as Redcliffe Training Associates Limited that deal with how to value companies in different industries, such as technology, commodities, or financial, as well as companies in different stages of development such as startups or those in decline.

Here are some of the key methods for valuing your company.

Business valuation
photo credit: Lending Memo

What Influences the Value of Your Company

First off, it’s important to know the different factors that influence the overall value of your company. Ask yourself what are the risk and rewards a potential acquisitor would have to consider if they were to buy your business. Many potential purchasers are hesitant to invest in a small business without a solid track record, and, similarly, if you’re operating costs are high, many may see the company as too risky to get involved with.

However, if your company is involved in a sector that’s undergoing current growth, you’ll see your valuation rise. The best way to influence the valuation of your company is to invest within: skilled employees, facilities, and copyrighted intellectual property are always sought after. Finally, ask yourself what is the supply and demand like in your respective industry. If your company is a big player in a particular market, even if it’s relatively small, you’ll be seen as a more attractive proposition.

Valuing Your Company

Asset valuation – asset valuation is commonly used when valuing companies in industries such as manufacturing or real estate, as the real value of the company is tied up in brick and mortar. You may also see this referred to when discussing declining businesses, as the lacklustre growth prospects mean all what is left of the company is to be stripped of its assets.

Entry valuation – the role of the entry valuation system is to determine how much it would cost to create a business of the same or similar standing to yours. This is particularly useful for companies that have the option of investing in their own resources, as the latter may turn out to be more financially viable for them in the long run.

Multiples of profit – multiples of profit is generally used for valuing businesses with a track record of profitability. This is useful for businesses that are still growing, and can be calculated as a multiple of their earnings. These earnings are usually multiplied by a factor of four to eight, with lower multiples used for small businesses.

How startup valuation works infographic
via Funders and Founders

The best way to value your business is to use a number of respective valuation methods. This will allow you to choose a valuation that more accurately reflects the intentions of the buyer and drive forward any potential deal. It’s also important to note that the value you determine your company to be worth may be substantially lower that what you could earn if you were to sell. After all, the business is ultimately only worth what someone is prepared to pay for it.