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A solid valuation is essential when you’re looking for investors, are planning to sell, or just want to be aware of how much your business is worth. There are several methods to determine a company’s worth. The best approach for you depends on your goals and also on the current state of affairs. In this article, Windes explores some of the most well-known methods of determining a company’s worth and explains the pros and cons of each.
Book Value
The book value method is a comprehensive list of all liabilities and assets in your company’s accounts which includes tangible and non-tangible assets like inventory equipment, property, as well as inventory. The formula is simple net worth is the sum of assets less liabilities. Pros: This is a quick and easy method to determine a company’s liquidation value, meaning the amount it would be worth if all assets were sold today at fair market prices. Cons: This method can leave out intangible assets or debts that could be incurred over the course of.
Revenue Multiplier
Another way to determine a business’s value is by the amount of earnings or sales revenues and then multiplying it by an industry multiplier. For example the virtual reality design studio may have high revenue but little profit, whereas manufacturers of parts for typewriters could have a lower revenue, but higher profits. This is a fantastic method to monitor growth and predict future earnings, however it doesn’t take long-term business expenses into consideration. It’s therefore ideal for smaller companies that don’t require large capital expenditures or loans in order to function.
