5 methods to evaluate a company’s worth

Determining the net worth of a company is one of the most important factors to take care of when selling, or purchasing a company. Using the methods discussed in this article, it is possible to get an accurate estimate of what one’s company may be worth, or aid in the evaluation stage of purchasing a company.

Asset Valuation

Asset Valuation is the summing up of the company’s tangible and intangible items. It is wise to use the book market value of these items to determine their worth; though accounting for possible depreciation due to use/age is also a factor. Things such as equipment, inventory, real estate, stocks, patents, and trademarks should all be considered in this valuation.

Historical Earnings Valuation

The business’s gross income, along with its ability to repay debt and capitalization of cash flow or earnings determines its current value. Should the company fail to bring in new or repeat business, the value of the company will drop when it is low enough that the company is unable to make payments on its bills. This works in the opposite direction as well, if a company pays off its debts ahead of time or as quickly as possible along with achieving a positive cash flow, it will improve the businesses value.

Relative Valuation

With this method, you would take a look at the business’s within the same sector, in the same range of net worth, and see how much they are selling for. While this may be inaccurate due to possible issues found during the discovery process of a purchaser, it gives a somewhat ballpark figure to base your personal estimate off of, which is used as more of a guideline rather than an actual estimate. This method is unlike the others and is meant to be used in conjunction with other valuation tactics.

Future Maintainable Valuation

Future maintainable is the idea that the profitability of the business in the future will determine its value in the current day. This method is used mainly when profits are expected to remain stable, but if a company fluctuates heavily, then it may not be the best decision to use this. To calculate this, evaluate sales, expenses, profits and gross profits from the past three years to create a forward projection using averages and conduct a standard trend analysis.

Discount Cash flow valuation

When profits are not projected to remain stable for the foreseeable future, it is prudent to use the discount cash flow valuation method. This takes your business’s future net cash flows and discounts them back to present day values. Using these figures, you can find the future net worth of the business, along with how much money your current/future assets will attain in the future.