There is no single way to value a business. However, if you are considering the sale of your company, it is likely that you will want to know how much you can expect to achieve from the sale – both for planning and marketing purposes.
Thankfully, most sellers tend to use one of four main methods as the best way of valuing their company, through assessing: price-to-earnings ratio, asset valuations, entry cost, and discounted cash flow. Below, we’ve explored each of these methods, in turn, providing an insight into the businesses that may suit each option, as well as an example of calculations for each.
Business Valuation Factors
No matter what valuation method you choose, you will have to consider one or more of your business’ assets and factors.Price-to-earnings ratio
The method of valuing a business by price-to-earnings (P/E ratio) is arguably the most common. It is considered the best choice for a business demonstrating strong profits as it can indicate both high forecasted growth and a track record of repeat business.Asset valuation
Asset valuation is often the method of choice for strong and stable businesses brimming with tangible assets, such as property and machinery.Entry cost
The concept of entry cost is just as it appears – the cost of creating your business from scratch should you start again.Discounted cash flow
Discounted cash flow is a complicated valuation method that is almost exclusively used by large, established businesses such as energy companies that are likely to be able to predict cash flow.The wholesale business has an established trading history and has built up a strong reputation and a loyal customer base. Business is drawn from a wide demographic of clients with a good spread across different business sectors.
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