Determining Your Business’s Market Value

Determining Your Business’s Market Value

When determining if you are ready to sell your company, it is important to think of the market value of your company. There are a number of ways to determine the market value of your company. When Peak Business Valuation, business appraiser, values a company, the appraiser will decide which method(s) is most applicable to your business.

Common Methods to Value a Business

The most common ways to determine the market value of your company are:

  1. Assets
  2. Market Multiples
  3. Cash Flow

It is also important to understand that there are other aspects to consider when assessing the value of your business. You need to look past financial calculations and understand the value of your business based on potential strategic value. What value does your company provide to a potential acquirer? These added values are synergies.

Synergies can help maximize your business’s market value.  Synergies reflect in the market value of your company. Let’s dive in and understand a little bit more how to assess the value of a company.

Peak Business Valuation, business appraiser, values companies across the United States. We have experience in almost every industry. If you are looking to buy or sell a company, Peak is here to help you understand the market value. Questions are always welcome. Get started by scheduling your free consultation today!

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The Asset Approach

Simply add up the value of all your assets and subtract any debts or liabilities on the company’s books. This value provides a starting point for determining the value of the business. However, the business most likely is worth more than its net assets. As such, we need to look into the revenue and earning potential of the company.

Market Multiples

Below are the most common multiples a valuation expert uses to determine the market value of a business.

Revenue Multiples

A revenue multiple is used to compare the annual sales of the company against similar companies based on size, geography, industry, etc… Depending on the size of the company, you may be looking at public or private company multiples. For example, let’s say your company is Qualtrics. Qualtrics was acquired by SAP for $8 billion. Based on Qualtrics’ year-to-date revenue of $372 million as of Q3, the implied revenue multiple would be 20x. Tech companies like Qualtrics are commonly valued using a revenue multiple rather than an EBITDA multiple as we describe below.

EBITDA Multiples

A more relevant measure for your company is EBITDA. EBITDA stands for Earnings Before Interest, Tax, Depreciation and Amortization. By utilizing an accountant or accounting software, you can produce this figure. If your company’s EBITDA is around $500,000 and you operate as a general contractor, a 2-3x EBITDA multiple may be applicable. In this case, the business is worth around $1.5 million. The average EBITDA multiple varies per industry. And, there are other factors that may increase or decrease the selected multiple. Peak Business Valuation, business appraiser, writes articles on multiples for most industries. Search our blog for your specific industry to see average multiples. 

Cash Flow Analysis

Last, the discounted cash flow analysis observes the annual cash flows of a business over a projected period. A valuation expert then applies the discount rate to the future cash flows in order to determine what the future cash flow would be worth today. Typically, the cash flow analysis provides support for the market value and is determined by revenue or EBITDA multiples.

Summary

Developing an understanding of the value of your business today can help you assess areas of weakness and strength. A quality business valuation report will detail the market value and how to increase it. Inquire and work with a valuation professional to understand how to use a business valuation as a tool for growth.

As a business appraiser, Peak Business Valuation is happy to be of assistance. We have provided over 3,000 business valuations for small businesses. We want you to feel confident in the transaction of your business whether buying or selling. A business appraisal is also helpful when growing a company. Schedule your free consultation using the link below.

 

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