If you have ever watched the TV show, Shark Tank, you know just how aloof business evaluations can be. The mere fact that a valuation can be negotiated shows just how much subjectivity business evaluations hold. But regardless of how you come up with the number, the valuation of your business is vital. The value of your business can help you determine your company’s financial and competitive standing. For larger public corporations, a valuation is typically created through the stock price. What about private corporations? There are three easy ways to find the value of your business regardless of size.
1) Stockholders’ Equity
This way of evaluating your company uses the classic accounting equation. Assets – Liabilities = Stockholders’ Equity. In this case, the stockholders’ equity is used as the value of your company. To calculate, take a look at your most recent balance sheet. Subtract your total liabilities from your total assets (including Intellectual Property and Capital). This is perhaps the simplest way to find the value of your business. The issue with this method is that it does not take into consideration the value of your entrepreneurship or the future potential of the company. The value of your entrepreneurship is often hard to define. It is often added to the equation when you personally have more social or cultural capital than most owners in your sector. For these reasons, this equation is best used for well-developed companies.
2) Comparing Sales
If there is a similar company that has a public valuation, you may be able to compare your total sales. In this method, your valuation would be calculated by multiplying their evaluation by your amount of sales (as a percent of their sales). This method only works if you have companies that are very similar to yours. New technology or production methods often streamline processes and cannot be compared to other companies in their own sector. If you are in one of these unique areas, you may want to use one of the other valuating methods.
3) Potential Future Earnings
Potential is a very subjective term. To take some of that subjectivity out of the equation,
and to calculate your value based off future earnings, you should take a look at your recent sales. As the Commonwealth Bank of Australia put it, the full equation is (average net profit/expected rate of return)*100. The only subjective part of that equation is the expected rate of return. Unlike the other methods, this is where your entrepreneurship and passion can play a role in determining the value of your company. But much like Stockholders’ Equity, this equation requires a decent amount of sales history to accurately calculate. Regardless, it is a great option for company’s whose intangible goods are some of their biggest assets.
Regardless of the formula used, a valuation will never be a simple process. A great quote from one of the Shark Tank investors, Barbara Corcoran, is “There is no real way to valuate a new business and there are no real formulas, despite what goes on the show. You’re really pricing a commodity based on potential, which includes the potential of the entrepreneur as much as the product.” The key with the valuation is to not over value your company. As passionate as you are about it, the valuation cannot take in consideration your passion, only your value as the entrepreneur.
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