Business Start Up Information: Understanding Business Valuation

Understanding business valuation is an essential piece of business start up information that you will need to learn. If you are considering starting a business or purchasing an existing one, you need to understand how to evaluate the value of a business. Here are a few things to consider about business valuation.

Business Valuation

There are many different methods that you could potentially use in order to value a business. All of them have some legitimate points and a few weaknesses. Essentially, the value of a business is what someone else is willing to pay for it. Therefore, there is no hard and fast rule when it comes to valuing a business. You have to take several different approaches and weigh them against each other to come up with the closest thing to market value.

Book Value

One of the simplest methods of business valuation is using the book value. This is also sometimes referred to as net worth. With this approach, you are simply going to total up the assets of the company and the liabilities. You are then going to subtract the liabilities from the assets of the company. The value that you are left with is the value of the company. While this strategy is very simple, it leaves out a lot of other variables. For example, you are not taking into consideration the human capital or projects that you have in the works. 

Capitalization of Earnings

Another method that you could use to value a company is the capitalization of earnings method. This method is going to take a hard look at how much the company has earned in the past. You might look at a certain period of time, such as how much was made during the last fiscal year. You would then use a capitalization rate to determine how much the business is actually worth.

Market Capitalization

If you are dealing with a publicly traded company, you can also use a market capitalization formula. For example, let's say that you have a company that has stock that is currently trading for $10 per share in the market place. If they have 10 million shares of outstanding stock, you would be able to determine that the value of the business is $100 million by multiplying the two numbers together. 

Economic Conditions

When you are evaluating the value of business, you are going to need to take a look at economic conditions. Most reports that come up with a business value start out by summarizing the current economic situation. During a good economy, the business is going to be worth more than it is during a down economy.

Total Approach

When you are trying to come up with an accurate value for a business, you are going to need to look at all of the different factors involved. Instead of looking only at the liabilities and assets, you need to factor in the employees, the patents that the company has, and anything else that could affect profitability.

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