How much is my business worth? It's the question I get from entrepreneurs who are considering sell a business. Especially from those who want to sell their business in the short term.
Logical, because business value plays an important role. But it's a question you should really ask yourself as an entrepreneur much earlier. Because so:
- Get a better understanding of what makes your business valuable
- Do you still have time to actively work on increasing that value
With the latter, you can think about reducing dependencies and whether or not to make certain investment commitments. By taking the right steps now, you can increase the financial value of your business even before selling it and make your business more attractive to a wider group of potential buyers.
This can get you a higher price, but also, for example, more attractive terms of sale. Timely insight into the value of your business is thus the key to maximizing the outcome of a sale.
How much is my business worth - the calculation methods
Determining the value of a business is not an exact science. It's a combination of thorough analysis, strategic insight and a bit of fingerspitzengefühl. And from that you run a calculation method. The two most common are:
- Multiple-method
- Discounted Cash Flow method (DCF).
1. Multiples: a quick, practical approach
If you apply the multiple method, you compare your business to similar businesses that have recently been sold or are publicly traded. Popular, especially in transactions. Often EBITDA (earnings before interest, taxes, depreciation and amortization) is the basis for this.
The big advantage of this method? The simplicity. You quickly have an indication of the value of your business. But here is also the limitation: Multiples are a snapshot and take little account of the unique characteristics, opportunities and risks of your specific company.
2. Discounted Cash Flow: an in-depth approach
With DCF, you look at a business's expected future cash flows. You calculate what those are worth today, taking into account any risks.
What makes the DCF method so powerful? It forces you to think about underlying "value drivers" and the future.
The criticism? A DCF analysis requires a lot of input: an integral multi-year forecast based on a realistic view of the future. And with that, 'garbage in = garbage out' definitely applies. But if you go through the process properly, a DCF analysis not only provides you with a valuation outcome, but also indispensable insights for making strategic decisions.
Why I choose the DCF method
Personally, because of the latter, I often prefer the DCF method because it gives more insight into the value drivers of a business. You then use the method not only as a theoretical exercise, but also as a tool to explore (strategic) choices and thus increase the attractiveness of your business.
A story from practice
I remember an entrepreneur who needed a (DCF) valuation for the tax authorities. A heavy administrative requirement, according to him. He had no budget, let alone a multi-year forecast. But in a number of productive work sessions, we drew up that forecast together. This forced him to think ahead and answer fundamental questions:
- What are the key trends in your market?
- What sets you apart from the competition?
- What growth can you achieve on a 'stand-alone' basis and what is needed to do this? Consider investments in personnel, assets, working capital, et cetera.
- How profitable is your business now and how can it be further improved? Are there processes that could be more efficient? Are there other opportunities to reduce unit costs?
- What are the biggest risks and how can you mitigate them? Consider market risks, dependence on the entrepreneur himself, dependence on large customers or suppliers, et cetera.
The idea of "administrative obligation" grew into a valuable process. So valuable, in fact, that the entrepreneur decided to structurally integrate the insights and methodologies gained into his business operations. And it inspired him to concretize new opportunities and work purposefully on the sustainable growth of his business.
Making your business even more valuable
So for me, a valuation is much more than a number on paper. The process is at least as valuable. It helps you as an entrepreneur to think about strategy, risks and choices.
So you not only get answers to the question "how much is my business worth?" but also "how do I make my business even more valuable?". And that's exactly what makes my work so interesting!
