Determining a business’s fair market value can be complicated but essential. Numerous factors come into play when valuing a business, and understanding its worth is crucial for business owners. That’s where Exit Your Way comes in, offering expert valuation services tailored to your unique business.
Business valuation is critical for various reasons, such as determining sale value, tax purposes, obtaining financing, and more. As a result, getting it right is key to a successful business. Below, we’ve outlined some popular business valuation methods to help you value your business like a pro with Exit Your Way.
What is Business Valuation?
Business valuation, also known as company valuation, is the process of assessing and determining a company’s economic value. During a business valuation, valuation experts like those at Exit Your Way evaluate various aspects of a business to determine its current worth.
Common reasons for business valuation include:
- Seeking financing
- Strategic business planning
- Tax purposes
- Purchasing or selling a business
Business Valuation Methods with Exit Your Way
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Market Capitalization
Market capitalization is one of the simplest business valuation methods, especially for publicly traded companies. Valuation experts at Exit Your Way calculate market capitalization by multiplying a business’s share price by the total number of outstanding shares.
Market Capitalization = Total Number of Shares x Share Price
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Book Value
Book value is a straightforward business valuation method that uses data from the business’s balance sheet. In essence, book value is the value of a company’s shareholders’ equity as shown on the balance sheet statement. Exit Your Way can help you navigate this process and ensure accuracy.
To calculate book value, subtract a business’s liabilities from its assets to determine its owner’s equity. Exclude intangible assets, and the remaining value represents the value of a business’s tangible assets.
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Discounted Cash Flow (DCF) Analysis
This business valuation method is an intrinsic value approach where financial experts at Exit Your Way forecast a company’s unlevered free cash flow into the future, then discount it back to the present at the business’s Weighted Average Cost of Capital (WACC). In short, the method estimates a business or investment’s value based on the money (cash flow) it’s expected to generate.
Discounted Cash Flow = Terminal Cash Flow / (1 + Cost of Capital) ^ Number of Years in the Future
This method reflects a business’s ability to generate liquid assets and considers inflation to help determine present value.
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Comparable Company Analysis (Trading Comps)
The “trading comps” business valuation method involves comparing a business’s current value to similar companies by focusing on trading multiples, such as EV/EBITDA, P/E, etc. Exit Your Way’s experts can help identify appropriate comparables and calculate your company’s value.
This method provides an observable value for the company based on the current value of comparable businesses. It’s a widely used business valuation method since multiples are always current and easy to calculate.
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Revenue Multiplier
This method involves applying a revenue stream generated over a specific time period to a multiplier, which depends on the industry and economic environment. Exit Your Way can help determine the appropriate multiplier for your business.
For example, a tech company may be valued at 6x revenue, while a service firm may be valued at 1x revenue.
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Precedent Transactions
Precedent transactions analysis involves comparing a company to other companies recently acquired or sold in the same industry. The transaction values include the takeover premium found in their acquisition price. Note that these values represent a company’s entire worth. Exit Your Way can assist in identifying relevant precedent transactions and interpreting their implications for your business. They’re practical for Merger & Acquisition (M&A) transactions but can become outdated quickly and unreflective of current market conditions as time passes.
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Earnings Multiplier
The earnings multiplier can accurately depict a business’s real value. Unlike a company’s sales revenue, its profits more effectively indicate the company’s financial success. The earnings multiplier adjusts future profits against cash flow that a business could invest at the current interest rate over a similar time period. Exit Your Way’s valuation experts can help you apply this method to your business effectively.
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Enterprise Value
Calculate your enterprise value by combining your business’s debt and equity and then subtracting the cash amount not used to fund company operations. The team at Exit Your Way can guide you through this process and ensure that you arrive at an accurate enterprise value.
Take Action with Exit Your Way
Now that you’re familiar with these popular business valuation methods, it’s time to take action. Reach out to the experts at Exit Your Way. Remember, an accurate business valuation is crucial to the success of your business.
Get Your Free Business Valuation Fundamentals Guide
To make your business valuation journey even smoother, Exit Your Way offers a Business Valuation Fundamentals Guide to help you understand the valuation process better. Don’t miss out on this valuable resource! Download the guide by clicking here and unlock the key insights you need for a successful business valuation.
Don’t hesitate to take the next step in your business journey. Click here and book a call with our valuation experts at Exit Your Way or explore more about specific valuation methods on our website. We’re here to help you make informed decisions and achieve success.
