How to Calculate Your Company’s Valuation

Getting a business valuation might sound like just another task on your endless to-do list, but it's actually one of the smartest moves you can make for your company's future. Think of it as getting a complete health check-up for your business - it helps you understand exactly what your company is worth, which is super helpful whether you're planning to sell someday, bring in investors, or just want to make better strategic decisions. Plus, knowing your true value can give you a serious advantage in negotiations, help with succession planning, and even make it easier to get loans or insurance. So read this article from Inc. and see how you can value your business.

FROM INC MAGAZINE / BY BRIAN CONTRERAS

or private companies that haven’t issued equity, estimating a valuation is rarely straightforward. When Inc. spoke with experts ranging from business valuation professionals to founders who’ve successfully bought or sold companies, the consensus was that valuation is as much an art as a science.

Still, that doesn’t mean there’s no roadmap. Here’s how our panel of pros suggests gauging your company’s worth before an exit.

Get prepped

First, you need to have all your ducks in a row, says CPA and business valuation expert Mark Gottlieb. Make sure your tax filings are compliant, reconcile those bank accounts, and prep a file outlining your vendors, key customers, leases, insurance policies, licenses, permits, and employees.

Ask for help

Most founders aren’t experts on corporate valuations. You might want to consult someone who is, says Jason Lee, a repeat founder who recently sold his New York City-based company Salt Labs. But not all do, including Lee himself, who has experience in finance and opted to handle the process internally.

Choose your methodology

Ask 10 people how to value a business and you’ll get 10 different answers. But there are some big-picture approaches to consider, says Gottlieb.

The asset approach is ideal for holding companies and those with no real operating income. This involves taking the fair-market value of all assets and subtracting any liabilities.

The market approach uses databases that show past sales of comparable businesses, so you can gauge what the going market rate is in a particular sector.

The income approach can assess corporate risk and cash flow using either a single-period capitalization of earnings method (based on the historical performance of a company) or a discounted cash flow method (geared toward small businesses likely to grow in the future).

Looking for something simpler? Try a formula. Many insiders recommend a calculation that adjusts your company’s EBITDA—or earnings before interest, taxes, depreciation, and amortization, a common measure of profitability—by an industry-specific multiple.

For instance, when founder Jason Hendren was considering selling his Sanford, Florida-based light manufacturing company to a private equity firm, he and his adviser tried to gauge the multiple by which other lighting companies were being valued, although the market information was limited.

You can also find lists of industry-specific EBITDA multiples online. Either way, this calculation creates a baseline that can then be adjusted to account for other sources of value, such as unique IP or pre-existing client contracts, says corporate lawyer David Bain.

Mix and match

There are other methodologies, too, says Bain, and valuation experts sometimes combine more than one strategy to generate a range of reasonable values.

Remember that, like any asset, a firm is ultimately worth only what someone will pay for it—which means the market in which you sell matters. Your valuation ultimately exists at a single moment in time, says Hendren: “When somebody’s sitting at the table ready to write you a check.”