How to value your business

Putting a dollar amount on a company you’ve poured time and effort into can be difficult. But certain scenarios require you to value your business—like being part of a merger or acquisition, paying business taxes or working with a potential investor. Plus, knowing your business’s valuation can give you insight into how much your company is worth and help you determine risk levels and make informed financial decisions.

There are different methods for valuing your business, and each offers its own view into how much your company is worth. Learn more about how to calculate your business’s valuation so you can determine which method to use. 

What you’ll learn:

• You can calculate your company’s value to determine how much it’s worth, understand its market position and get a better idea of its financial health.

• There are different business valuation methods—like market capitalization, liquidation value, earnings multipliers and more—each providing different insights.

• Your business’s valuation is key when selling a company, attracting investors, getting financing or paying business taxes.

There are various ways to value your business, so you might get different results depending on the method you use. One method isn’t necessarily better than the others—it just depends on the perspectives you’re trying to gain. Here are some common business valuation methods worth exploring:

Market capitalization—or market cap for short—is a straightforward way to value publicly traded companies by multiplying the current share price by the total number of outstanding shares. When calculated, market cap shows what a company is worth at a given time based on market conditions. This number can fluctuate based on shifts in stock prices or whether the company issues or buys back shares. This method is often used to assess the size of a business and how it compares to similar companies.

Market capitalization formula: Market capitalization = Current share price ✕ Total number of outstanding shares

This type of business valuation looks at the amount of net cash available if a business decided to cease operations and liquidate its assets to pay off outstanding liabilities. Investors typically use this valuation method as a way to assess a company’s risk level and get a better understanding of its financial health. 

Liquidation value formula: Liquidation value = (Total tangible assets − Inventory and receivable discounts) − Total liabilities

The times revenue method estimates a company’s value by multiplying its revenue over a specific period by an industry-based multiple. The multiple used is based on economic conditions at the time, but often hovers around one or two. This range can serve as both a starting point and an end point to assess how little or how much someone might pay to purchase the business. This model does have some limitations because revenue doesn’t always equate to profit, since it doesn’t account for expenses.

Times revenue formula: Times revenue = Company revenue over a set period of time ✕ Industry multiple

The earnings multiplier method—also referred to as price-to-earnings ratio—assesses a company’s value by comparing its current share price to its earnings per share. It indicates how much investors are willing to pay for each dollar of a company’s earnings. Because profits are generally a more dependable way to measure financial success than revenue, the earnings multiplier method can provide a more realistic valuation than the times revenue method.

Earnings multiplier formula: Earnings multiplier = Price per share/Earnings per share

Like the earnings multiplier method, the discounted cash flow (DCF) method values a company based on future cash flow projections. These future projections are discounted to determine the company’s current market value. Unlike the earnings multiplier, however, DCF takes the time value of money into account—incorporating risk, growth and inflation—when determining the present company value. Investors often use DCF analyses to determine how valuable a business might be as an investment. As a business owner, you might also calculate your company’s DCF when making budgeting or financial planning decisions. 

Note that in the formula, “n” represents the company’s cash flow for additional years after the first two years are accounted for. 

DCF formula: DCF = Cash flow for Year One/(1 + Discount rate)¹ + Cash flow for Year Two/(1 + Discount rate)² + Cash flow for Year n/(1 + Discount rate)ⁿ

This method values a company based on its shareholder equity, which appears on the balance sheet. Book value estimates how much shareholders would receive if the business underwent liquidation. Investors often use book value—along with other financial ratios—when valuing a company. Book value can also be used to compare companies’ market value to assess whether a stock is underpriced or overpriced.

Book value formula: Book value = Total assets − Total liabilities

There isn’t a one-size-fits-all approach when valuing a company. It depends on the insights you’re hoping to gain. You may even choose a combination of methods to get the most accurate valuation figure. When deciding which method to use, consider factors such as your business type, industry, financial health and the purpose of the valuation—whether it’s for sale, investment or tax reasons. Some methods work better for certain business types or valuation goals. 

While independent third parties can provide business valuations, you can also conduct one yourself. You might also consult a professional to determine which valuation method makes the most sense for your needs.

Part of selling your business involves valuing your company, but here are some other steps you can take to be prepared:

• Set a goal. Before you put a for-sale sign at your company’s headquarters, start by setting business goals to fully understand what you’re trying to achieve from the sale. Prioritizing the goals that are most important can provide alignment when it’s time for negotiations. 

• Determine your business’s value. Valuing your business equips you with the knowledge of how much your business is worth when you’re ready to sell. Working with a professional can help you put an accurate price tag on your company while also providing additional insight into its market position and overall financial health.

• Get organized and gather tax records. Preparing your company’s financial information ahead of time ensures you have accurate records and simplifies the review process for potential buyers. Having correct tax records is crucial for guaranteeing a clean sale without legal risks. Be sure to include at least three years of documentation, paperwork and tax information.

• Find the right team. Putting together a strong support team to guide you through the sales process might be an added cost, but it can be worth it in the long run. Hiring a lawyer, an accountant and even a business broker can offer invaluable expertise, reduce the chance of mistakes and safeguard you from financial issues down the line.

• Communicate with stakeholders. Inform employees, leadership and other stakeholders about the business sale once confidentiality agreements allow. This promotes transparency and can give your team a better idea of what to expect during the transition. To avoid disruption and provide ample time to iron out final details, you should also make clients and suppliers aware of the sale. 

• Promote your business. Promoting your business through different marketing strategies can help attract a wider pool of interested buyers. You might choose to work with a marketing professional or try your hand at promoting the company yourself. There are many ways to attract buyers, including traditional marketing techniques, like direct mail or print ads, and digital marketing methods, like social media or email campaigns.

• Create an agreement and complete the sale. Once you’ve found a buyer and settled on a sale price, you can draft a sales agreement with your lawyer and proceed with the process of transferring ownership. You can expect some back and forth during this step, so patience is key to making sure the transition is seamless.

Understanding your company’s valuation gives you a realistic idea of your business’s worth in dollars. This figure can be important when working with investors, securing financing, preparing taxes or selling your company. It can also help you better understand your company’s market position and overall financial health. 

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