The only certainty in the world of business is uncertainty. With the landscape and trends constantly changing, you need to make sure you have a way to track the progress of your business through the often turbulent waters.
There are over 26 million businesses in the U.S. alone, and nearly 550,000 new companies are being formed each month. If you’ve just joined the shark tank, you need to know about these five business valuation methods.
This approach is one of the more extrinsic ones, as this method looks at recent valuations of similar businesses in the same industry as yours. Say you’ve just started a carpentry business. Wouldn’t it be helpful to attempt to predict your company’s success based on data from others? This method is particularly useful if you have multiple comparable businesses. The more comparable businesses you have, the stronger your negotiating position will be.
Discounted Cash Flow
While comparable transactions focus extrinsically on determining business value, this set of business valuation tools measures future intrinsic company value. Since this business valuation analysis looks toward future earnings rather than historical earnings, it’s particularly effective for early-stage businesses.
Potential and Talent
At the core of the 5.4 million businesses with employees, it’s all about supply and demand. If your business offers a product or service that is currently in high demand, investors will get a glimpse of your business’ value by assessing your earning capacity based on that. In addition, investors prefer to see early evidence of market traction, so your talent also plays a pivotal role in establishing that early traction.
Asset valuation is one of the best liked and most effective company valuation tools. This method places a value on all of your business’ assets and subtracts liabilities to arrive at a final value. Consequently, you’ll need an updated balance sheet to briefly sum up your business’ assets and liabilities.
Business valuation tools are only as useful as you make them. You can have business valuations done and ignore the results, or you can learn from them and your company can thrive.