What’s Your Business Worth? Determining Your Market Value

By April 12, 2021 News
CHI Blog

What's Your Business Worth Determining Your Market Value

Putting a value on a business is a complex process. It goes far beyond simplistic revenue calculations.

It’s hard to put a value on your business when you’re so close to day-to-day operations. Whether you need to secure additional funding, want to expand, or retire—it’s essential to know what your business is worth.

So, what’s the best approach to valuing your company?

The market ultimately decides value based on how much someone is willing to pay for something. For businesses, asset sales and cash flow are dominant benchmarks.

This article will explore a few key considerations and models you can use to value your business.

Why Would You Need to Know the Value of Your Business?

You may someday need to convince investors and buyers that your company is worth investing in or purchasing.

How do you show an investor the value of your organization? Can you persuade a source of financial capital to choose you? Some reasons for determining business value include:

  • Putting the company up for sale
  • Attracting investors
  • Securing loans from a bank
  • Selling stock of the company
  • Preparing to go public
  • Gaining a better understanding of your financial situation

An inaccurate valuation can be a costly mistake, as you can upset your investors, cause financial setbacks, and create a bad reputation among your partners.

How Do I Determine Business Market Value?

So how do you find out the value of your business? What should you measure precisely, and what factors should you consider?

Value of Assets

Almost every owner looks at the value of everything the company owns, including product inventory and equipment, and debts. Asset value is an excellent starting point, but don’t make the mistake of relying on it primarily.

The following are some examples of assets for hospitality businesses:

  • Leasehold improvements and Trade fixtures
  • Equipment and Business Chattels (everything from flatware and tables to cookware and appliances)
  • Licenses – the business license, liquor license, and any others that may apply to the business
  • The Lease (provided that the terms are favourable and extend for years in the future)
  • The Brand and Goodwill (if you are selling this with the business)
  • Intellectual Property – patents, recipes, processes, workflows, and anything else knowledge-base that is proprietary to the business.

The value of a business is very much tied to the lease in place. If there are only a couple of years left on the lease the value is much lower than a place with the security of a long lease. Also, contributing factors are if there is a sale/demo clause or a lease cancellation clause. Ultimately, if the landlord can terminate the lease at any time, this greatly impacts the value for the business.

Other factors matter too. For instance, whoever purchases a business also inherits the current workflows and future sales.

Total Revenue Generated

Consult with your broker to find out the annual sales the company generates. What are your profits likely to be, and how does this figure compare to related companies in the industry? A business’s profitability is vital to understand, E.g., How much actual cash flow does or will the owner(s) see from the business? Do they need to work there to collect a salary?

Just as important is how sustainable this figure is. Can you trust that these numbers will hold up years from now?

Changes in Your Financial Situation

Use historical financial data to determine how business profit changes over time. Remember that profit can vary based on how the customer base expands and what new supplier relationships the business faces.

One metric to look out for is the price-to-earnings ratio or P/E. If you can find out the projected earnings and P/E ratio, you can calculate the estimated revenues in the next few years. Another is discounted cash flow, a formula that looks at your annual earnings and projects it into the future. Several online calculators are available to help you with this one.

Stacking Up With the Rest of the Industry

Business does not happen in a vacuum. Research the industry and other related companies in your field. How much have they sold for, and where is the industry in general headed? If your company stays in line with the market averages, financial experts are more confident in your future success.

Other Considerations

There are several non-financial factors to consider. Geographic location impacts revenue growth depending on the business industry. Finding positive synergies with other companies matters significantly as well.

You must understand that the market ultimately determines your organization’s value, regardless of what your calculations tell you. A corporate valuation can give you actionable insights into your business decisions, but try not to be stubborn with your numbers. The investors and buyers make the actual decision in the end.

Need Help Determining Your Market Value? CHI Real Estate Can Help

CHI Real Estate specializes in commercial, hospitality, and investment real estate.

Are you interested in assessing your company for a future sale? Let’s chat. We can help you figure out the best approach to selling your company.

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