Although there are many methods that can be employed when attempting to determine the value of a business, there are certain factors that are common to all systems of business valuation. These key components form the foundation for an accurate estimate of an operation’s worth and can be broken down into two main categories: assets and revenue.
Assets are generally the physical items that a company uses to produce its product. For instance, manufacturing equipment and machinery, cash registers, and computers would all be considered pieces of the business to which a value should be assigned. A company’s existing inventory of finished product may also be considered an asset.
Less tangible assets are equally important. Intellectual property, such as patents and copyrights, can be of significant value to a business operation, as can key employees, especially when evaluating management prospects and sales potential. Don’t forget to also consider customer relationships. In many businesses, existing client contracts represent a sizeable portion of future revenue and should be factored into every business valuation.
Calculating the value of assets is pretty straightforward. Accurately estimating revenue—both current and potential—is a bit trickier, but it can also be accomplished. One of the most direct methods used to determine current revenue is to examine the accounting books of the business. Here you will find a wealth of information that sheds light on just how profitable the operation has been. This information also offers you some insight into the recordkeeping practices of the business which, in itself, may be telling.
Revenue, or how much cash the company is currently generating, gives you an overview of the profitability but also offers you the opportunity to discern trends and patterns that may indicate the future potential a business venture holds. Are sales declining, or has the operation reported double-digit growth quarter over quarter? This estimation of growth potential can be a substantial part of your overall business valuation.
The earnings generated by a business can be an even more precise indication of its value. Sales numbers might be great but if expenses are excessive, genuine earnings may not be as high as they seem. Again, a careful examination of the business’s books, specifically the balance sheet and profit & loss statements, should provide you with an accurate picture of current and future earnings potential.
Finally, take a step outside the business and assess the environment in which this business operates. External factors, such as competition, are critical in determining business valuation.
Performing each of these steps may seem like a lot of work, but all that effort will pay off. Sunbelt Atlanta can help you with the valuation process backed by knowledge and experience.
