A clear and updated knowledge about your business’ worth is one of the most fundamental pieces of information you should have about your company. The actual valuation depends on several factors, from the current state of the economy to the numbers on your balance sheet. That’s because a business’ value means very different things to different people. For instance, while a business owner feels that their company’s long history in a community is worth a lot, to an investor, the value might be dependant entirely on the revenue it generates. Another thing that affects the valuation of a company has to do with the circumstances of a sale – the same business, when sold in a hurry, will fetch a very different price when it is a well-considered sale planned as part of a larger commercial plan.

The most important rule is this: business owners should never do their own business valuation. A valuation needs to be an objective measure that can be helpful for you to make the best possible decisions – you, as the owner, will find it difficult to step back and see things from a distance.

There are basically three valuation methods for your business

1. Asset-Based Approaches: The question this method seeks to answer is this: “what will it cost to create another business like this one that will produce the same economic benefits for its owners?”Since every operating business has assets and liabilities, the accepted way to address this question is to determine the value of these assets and liabilities. The difference between the two is the business value.
2. Earning Value Approaches: These business valuation methods are based on the concept that a business’s true value lies in its ability to produce wealth in the future. The question it seeks to answer can be simplified as: “If I invest time, money and effort into business ownership, what economic benefits will it provide me, and when?” The wealth creation here is calculated as an activity that will happen in the future – that is, the money is yet to arrive, which means that this method also factors in the fact that there is a measure of risk involved.
3. Market Value Approaches: Market value approaches begin by comparing your business to similar businesses that have recently been sold, in order to arrive at a valuation for you. This method also takes into account the signals from the real markets and trading places, and seeks to answer the question “What is the worth of other businesses that are similar to my business?” Reliable and up-to-date market data is absolutely crucial for this method to be accurate.

Don’t forget that different business valuation methods can produce different results, since each buyer who looks at a business will have different income projects, risk assessments, capitalisation rates and discount rates. We at Augment can help you arrive at an accurate and trustworthy valuation that can aid you in taking the best possible decisions regarding your business.