Your company is valuable to you. Maybe you started it from scratch. Maybe it was inherited through your family. Or maybe you invested your hard earned savings and bought a business that is now thriving because of your hard work and dedication.
But What Is Your Company Actually Worth?
Not just to you. But its actual market value. Whether you’re thinking about selling your business now, planning for retirement or thinking about an exit strategy in the future, knowing how to value your business can be hugely beneficial.
But where do you even start?
You want a valuation that doesn’t sell your business short, but also doesn’t over estimate its worth either.
It might feel a little complicated and overwhelming, but by looking at a variety of measures, it is possible to know a pretty good estimate of the real value of your company.
What Factors Affect Your Company’s Value?
Regardless of how you view your business, there are certain factors that can have a positive, or negative, impact on the value of your company.
- Performance
Your company’s performance will obviously impact its value. One that shows growth within its industry will definitely be of more worth. But as well as growth, consistency is an important factor too.
2. Industry/Sector Challenges
The industry that your company operates in can influence market value. If active within a ‘hot’ and thriving industry, then your company is likely to achieve a higher valuation than a similar age business within a dwindling industry.
Also the larger the industry that your company is active in, the bigger the potential for investment as the opportunities for growth will be greater.
3. Debts
Company debt, while often unavoidable, will increase company liability on the spreadsheet.
While debt itself does not dilute ownership, debt repayments do obviously reduce net income which can impact business value.
4. Goodwill
On a company’s balance sheet, ‘goodwill’ represents an intangible asset. Goodwill doesn’t always affect the market value of a company, unless the goodwill becomes impaired, in which case the effects can be substantial.
5. Staff
A team of great staff who can efficiently run a business when the owner is not present will hugely increase your company value. Replace it with – ‘companies saleability’.
If your company’s efficiency and performance relies heavily on the owner’s presence, due to their skill set, experience or other factors, then the value (replace with – ’saleability’) of the company would be far less favourable.
These are all factors to consider when preparing for a business valuation, whatever your reason. Whether it’s to plan your exit strategy, or just planning your company’s next chapter for the future.
But HOW Do You Value Your Company?
EBITDA – the most favourable way to value your business.
What is EBITDA?
EBITDA is a measure of profitability and is short for….
E – Earnings
B – Before
I – Interest
T – Taxes
D – Depreciation and
A – Amortisation
EBITDA provides a single measure of financial strength and performance that is relevant across industries. This is also a good way to value businesses with high value expenses that would detract from the net profit.
Though a useful tool, EBITDA can sometimes be misleading as it strips out the cost of capital investments, such as property and equipment. But it is still found to be a more precise measurement of performance as it shows earnings before financial deductions and accounting influences.
EBITDA is a widely used metric of corporate profitability and a great way to compare companies’ performances against each other, regardless of industry, as well as highlighting core profit trends.
How To Calculate Your EBITDA
Now we know why EBITDA is a great tool, let’s look at HOW you can calculate the EBITDA of your company.
There are two formulas used to calculate EBITDA. Both use figures that can be easily found on your company’s income statement and balance sheet.
First Formula
EBITDA = Net Income + Taxes + Interest Expense + Depreciation + Amortisation
And
Second Formula
EBITDA = Operating Income + Depreciation and Amortisation
To summarise
-EBITDA is net income with interest, taxes, depreciation and amortisation put back.
– EBITDA can be used to compare and analyse profitability of a company against market competitors and across other sectors.
– EBITDA eliminates the effects of financing and capital expenditures.
Blood, Sweat & Tears
This is the stinger.
Hours you put into your business over the years, sadly, don’t reflect in the market value of your business.
Gutting isn’t it?
When you’ve spent late nights and long weekends putting your heart and soul into the company, it’s easy to feel it should be worth a lot more.
This is why people often overestimate the value of their business, which can then lead to disappointment and frustration when the actual value is calculated.
It’s good to remember that potential buyers are rarely sentimental. So it’s best to be pragmatic and down to earth with this process.
Due to these factors, it’s helpful to have someone to guide you through the process of business valuation and the next chapter for your company.
Someone who has been where you are now.
Someone who has been there and done it, multiple times.
This is where the Business Success Consultant can help. To advise and guide you through what can feel like a stressful and overwhelming process.
But with the right guidance and expertise, things will be smoother. More manageable. For you and your company.
So what have you got to lose? Why not book a FREE 15 minute discovery call with me, Clive, The Business Success Consultant, and I’ll help on your journey.
