One of the most important steps that business owners can take is to get a clear idea of the worth of their business. There are many valuation models that you can employ to determine the value of your business. However each model requires different amount of information, based on the available data.
The market-based method includes, for instance, looking at similar companies to get an idea of their value and then using this value to determine the value of your company. Although this is a straightforward and effective method however, it can be challenging when there aren’t enough comparable companies in the marketplace.
A multiples valuation model is another popular method. It determines the value of your business by comparing it with similar companies in your industry that have recently been bought or sold. While this is a great reference, it could become dated quickly since market conditions change frequently.
Finally, the asset-based valuation method is a bottom-up approach that looks at your business’s physical assets like equipment, inventories, patents, goodwill and property in order to determine its value. This is an effective valuation technique that can be used when your business has more assets than income.