Understanding the value of your business can be important if you’re planning on selling up, seeking investment or securing financing. There are a few different ways to estimate your business’s value. This post delves into a few different methods.

Consider your income

One of the most straightforward ways to value a business is through its income stream. This approach focuses on profitability and future earnings potential. You’ll need to first calculate your EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). Then multiple this by 3 (for higher growth businesses, multiply by 4 or 5 or more). This will give your value (for example, an EBITDA of $200,000 x 3 will put the value of your business at $600,000).

For stable businesses with predictable revenues, there is another income-based method you can use called the DCF (Discounted Cash Flow) method. You can read more about this method here.

Try the market approach

Another way to estimate the value of your business is to compare it to similar businesses that have recently sold. This method works a bit like valuing a house based on the sale price of other neighborhood properties.

Look at business listings online via broker sites and try to find companies of a similar size, location and industry. Some of these listings may tell you how they valued their business, which may give you an idea of how to value yours.

Use your assets and liabilities

An asset-based valuation tallies what your business owns minus what it owes to provide a ‘book value’. This involves listing tangible assets (inventory, equipment, real estate) and intangible assets (patent, customer lists, and then subtracting liabilities (loans and accounts payable). For example, $1.2 million in assets minus $300,000 in liabilities would put the value of your business at $900,000.

This is typically only a suitable business valuation method for companies that own real estate or asset-heavy industries like manufacturing.

Get a professional valuation

An expert business valuation could give you a much more accurate and credible figure. This involves using a professional appraiser or a business broker who can look at your financials and work out the best calculation method based on the nature of your business.

Such a valuation can help to strengthen negotiations - buyers and investors are less likely to quiz you about the figures if a third-party expert has done all the math for you.

Can you boost the value?

Your business’s value isn’t set in stone. There are many steps you can take to boost it such as finding ways to increase profits, making cutbacks and reducing debt. Measures like resolving legal issues and boosting your online reputation through positive reviews and feedback can also potentially boost your value.

This could be something to consider if you’re planning to sell your business in the future and the current value is not looking great. It does mean having to put in some extra work before you can leave your business, but it could be worth it for the extra money you can make from a sale.