Knowing how much your business is worth will help you decide whether to pay for a new piece of equipment, or to enlist an associate or look for investment funds. It also serves as an understanding of how your financials are doing, and can be useful to compare your business’s performance against other companies in your industry.
One method to assess the worth of your business is to add up the value of assets, such as inventory and property, and subtract any debts or liabilities. This may be a good starting point, but you should remember that your company is more than just its assets and liabilities.
To determine a more accurate value one can consider the market method, which is based on the price similar businesses have recently sold for. This method uses what’s called seller’s discretionary earnings, also known as SDE, which is similar to EBITDA, but adds back in items that aren’t essential for business operations, such as employee outings, charitable donations and one-time purchases.
A multiple of annual sales can be used to evaluate revenue. The amount of money you earn can be different based on the industry and trends and a knowledgeable business adviser or broker can offer advice on what’s appropriate for your specific company. It’s crucial to update your calculation on a regular basis and work with an appraiser of a professional to get the most precise estimation of the value of your business. They can also assist in preparing for a possible acquisition or sale of your company.
