Best Business Valuation Formula for Your Business

When you are interested in buying or selling a business, the first piece of criteria investors and buyers look for is a healthy business valuation that indicates strong sales numbers and favorable future earnings. The best business valuation formula consists of multiple measurements that gauge the financial health of a business. Find out more about how you can confidently buy or sell a business with a strong and proven business valuation.  

Take into Account All Business Assets

A substantial portion of your business valuation will depend on everything your business owns which can include product inventory, equipment, facilities, patents, and intellectual property, just to name a few. But a business is worth more than just its assets. It is also important to take into account the yearly revenue and gross profit of your business that is generated by those assets. 

Talking with your head of accounting and asset management team is a good starting point to get a good grasp of where the current value of your company is.  

Revenue of Products and Services

Most businesses today are evaluated on certain financial data, like yearly sales and how much revenue is generated per month. Identifying all points of sale can be an intimidating task, and summing up all products and services sold may urge the aid of a professional business valuator. Alternatively, a stockbroker or business broker can determine how much a typical business in your industry might be worth given a certain level of sales.

Using Earnings Multiples

Another measurement of a company’s value is utilizing an earnings multiple formula, also known as the price to earnings ratio. It is highly recommended to estimate the company’s potential earnings for the next few years in business. For example, if the price-to-earnings ratio is 15 and the projected future earnings are $500,000 a year, the business would be worth $7.5M. For big businesses that have multiple shareholders, observing multiple earnings per share of stock is a common method to evaluate a business. A business’s ability to produce future profit is determined through an earnings valuation which is a must-have for an individual that is looking to purchase or invest in the business.

Cash-flow Analysis

Prospective buyers of a business very often want to know how much cash a business can generate. The cash-flow analysis uses data from a cash flow statement that shows outgoing and incoming money over a specific period of time. Then the current cash flow number is then discounted for its future value. It’s a formula that is called the discounted cash flow analysis that takes into account the annual cash flow and projects it into the future.

Calculating  Gross Sales

The gross sales of a business is the grand amount of all transactions reported in a certain period of time, and it is usually calculated at the end of the fourth quarter of each calendar year. Investors and individuals that are interested in purchasing a business like to examine a gross sales report that displays data for the past three years to identify consistent sales and growth. 

Heron Nelson

Heron is a business blogger with a focus on personal finance and wealth management. With over 7 years of experience writing about financial topics, Heron has established herself as a trusted voice in the personal finance space. She has a deep understanding of financial concepts and strategies, and is able to explain them in a relatable and actionable way for her readers.