How to Value a New Business?
Determining the value of a business can be a complex task – whether it’s a small business or a medium to large-sized startup. You need to understand business finance, consider market dynamics, and evaluate factors that affect your business.
In this blog, let’s discuss in detail how to value a new business or determine the net worth of your startup. But first, it’s important to understand when it’s needed to perform the business valuation process.
Why New Business Valuation?
There may be a variety of reasons why business owners may want to calculate the business value of their venture, such as:
- For the acquisition of another company
- Upcoming merger of your business with another company
- Forming a new business partnership
- Changing business structure (like switching from sole proprietorship to partnership)
- To attract investors or raise capital
- For selling out some operations or an entire department
- For taxation purposes
- To determine the insurance premium
How to Calculate Online Business Value?
Whether you have a physical business or run an online business, the valuation process is almost similar. So, let’s take a look at some popular new business valuation approaches that you can use.
Book Value Method
The Book Value Method is a straightforward approach to valuing a business, especially for those with tangible assets. It involves assessing the net value of the company’s assets after deducting liabilities.
Start off by gathering financial statements. Obtain the latest balance sheet of your business that includes information about assets, liabilities, and equity.
Next, calculator the book value. This book value is essentially the shareholders’ equity. To find the amount, subtract total liabilities from total assets. Don’t forget to adjust the value for depreciation if your business holds significant tangible assets such as machinery or property.
The book value mainly deals with tangible assets. However, you may need to separately calculate the worth of intangible assets too like patents or brand goodwill.
Lastly, evaluate book value per share by dividing the book value by the number of outstanding shares. When you reach out to potential investors, this information will be extremely useful.
Market Capitalization
Market Capitalization is particularly suitable for publicly traded companies listed in the stock market. It represents the total value of your company’s shares in the stock market.
First, you need to look up the current stock price of your business in the stock market. Now check your financial reports to obtain the total number of outstanding shares. You can determine the market capitalization of your business by multiplying the stock price by the number of available shares.
When taking this approach, remember that the market for every business is different. So, evaluate the market cap compared to industry peers to understand the relative value of your business.
Earnings Multiplier
If your business has a consistent income history, then the Earnings Multiplier method may be ideal for you. It provides a valuation based on earnings over a specific period.
Thus, begin by finding the earnings of your business. It’s best to consider the average annual earnings of your business over the last few years. Then select an earnings multiplier based on industry standards or your competitors. This multiplier is often specific to the industry.
Multiply the average earnings by the chosen multiplier to obtain the business value. Keep in mind that the earnings may vary with time. So, monitor prediction reports for future earnings and adjust the multiplier accordingly to account for potential growth or risks.
Future Valuation
The future valuation method works best for startups that may not have a substantial history. So, its primary focus is on the expected returns in the next 5-10 years.
The initial step in this method is to develop detailed financial forecasts for the upcoming years. It’s important to consider revenue, expenses, and profitability during this step. Next, use Discounted Cash Flow (DCF) analysis to estimate the present value of future cash flows. This involves applying a discount rate to adjust for the time value of money.
Also, you need to consider potential risk factors. Assess and incorporate the risk factors that can impact your business’s ability to meet expected returns. Lastly, sum up the present values of future cash flows to arrive at the business’s future valuation.
Enterprise Value Method
The Enterprise Value Method is a comprehensive method of valuing a new business. It provides a detailed view by taking into account both equity and debt in the valuation. So, it’s especially useful when assessing the business as a whole.
In this method, calculate market capitalization as explained in the above sections. In addition to market capitalization, include all outstanding debts and liabilities. This represents your total enterprise value.
Next, deduct cash and cash equivalents from the total enterprise value. This adjustment accounts for the business’s liquid assets. The final figure after adjustments represents the enterprise value. It offers a holistic view of the business’s worth.
So, this was a brief overview of how you can determine the worth of your new business. Explore the different methods, determine which one is suitable for you, and implement them.
