How much is your company actually worth?

And how do you know it’s being priced fairly? 

Valuation: a fancy word for the price someone is willing to pay for your company. I.E., a number that can either make you feel good about your company or think, man, I got to step up my game to be more competitive in the market. A valuation is like ranking a football team in the NFL. You consider how many games they have in the previous season, how many games they have lost, their division, and whether have they been in or won a Superbowl. All these factors influence their ranking, just like similar factors determine your company’s value. Let’s dive into what some of those influencing factors might be.  

When determining the valuation of your company, it is vital to consider the market valuation because the fundamental valuation drives the market valuation. So, what is the difference between market and fundamental valuation? The market valuation is based on when your company is sold, and fundamental valuation determines if your company and the stocks are valued correctly. This means you can ensure that you sell your company for what it is worth without getting ripped off. There are three primary approaches to determining the valuation of your company, and no one approach is better than another. The best practice to determine your company’s valuation is using at least two of the below approaches, if not all of them. Let’s begin by defining each of these approaches and how they can best determine your company’s worth.   

  1. The Market-based Approach
    The market-based valuation approach aims to determine what other companies are selling for within your market. Think back to selling lemonade as a kid; you want to price higher than the competition but not so high you lose buyers. You don’t want to lowball or overprice your company.  
  2. Asset-Based Approach
    The asset-based approach deals with your company’s total assets minus its total liabilities. Think of this approach as a pre-nuptial agreement. The buyer wants to know if their potential spouse has a designer shoe habit before they open that joint checking account. This approach enables the buyer to determine the cost of the business’ annual upkeep and any debts that need to be paid.
  3. Income-Based Approach
    The income-based approach to determining valuation is based on precisely that, the income of your company. Estimating expected cash flow determines if the ‘present value’ has a return that can sustain growth. The best way to determine the ‘true’ valuation is to utilize all three different approaches because each approach sort of spills into each other like a plate full of food on Thanksgiving. A multi-approach valuation creates a snapshot of your company to get a clearer picture.

A word of caution: Like a snapshot, a valuation captures a moment in time, and while they do include forecasts for the future, a business valuation can change at any moment due to fluctuations in the market. Selling your business is a gamble. Many business owners get stuck on when to sell because they can gain a higher sell price in the future. Don’t get so caught up in potential gains that you loose the advantage you have.  

Ready to dive into the numbers? C-Level Strategy can help you determine the valuation of your organization and compile an exit strategy, even if you aren’t looking to sell for a while. Research has shown that you are 42% more likely to achieve a goal if you write it down, so let’s map out and write down your valuation so that you have an exit strategy representing your hard work, sacrifice, and success.   

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