How to Determine the Value of Your Company

If you are looking to raise capital, borrow money, sell your business, or buy another business, you will need to determine the value of your company. The value of any business goes beyond the bottom line. To help you determine the value of a business, consider the following factors.

Revenue

First and foremost, the value of a company is determined by the financial success it experiences. Things to look at are the revenue or sales of the company and the net profit. However, if you want to see if the company is good at doing its core function, examine the EBITDA, Earnings Before Interest, Taxes, Depreciation, and Amortization. This number examines the cash that is generated by its core business function. The issue with looking at the bottom line, the net profit, is that it includes financing decisions the firm made and can falsely elevate a profit. EBITDA should grow over time as well. If you see it shrinking, figure out why. Is it a market condition, an internal operations issue, or something else?

Trends

The next step is to examine their trends over time. Have they been performing consistently? Is there a steady growth pattern? Or does it look like a downward trend? Even though past performance doesn’t guarantee future performance, they do serve as a good idea of how the business will perform. Consistent growth indicates the core functions of the business are solid and being managed properly.

Margins

Be certain to inspect all of the margins - gross profit margin, operating profit margin, net profit margin, etc. Each margin will provide you insight into different aspects of the business. You’ll be able to see the efficiency of their operations, the impact of their cost structure, and how their financial decisions have impacted the bottom line. Generally speaking, a higher profit margin means less risk. However, that’s just one piece of the puzzle. You will want to watch the trends and examine their management structure.

Management

What does your management team look like? If it’s a small group of leaders, or just yourself, that will have an effect upon the valuation of the company. If it’s just you, are you willing to stick around, or do you want to punch out? The success of your business is one part of the fundamentals of the core business activity and one part of the leadership of the firm. When buying or selling a business, always consider the impact of the leadership on the business. What happens if they all leave? How strong are the fundamentals? Can they withstand a leadership transition?

As you begin to evaluate the value of your business, consider the four metrics above - revenue, margins, trends, and management. They will give you an idea of the value of your business. They will also help you identify where you might need to improve things to raise the value too.