One of the best practices for any business owner is to know the value of your business. Knowing the value of your business gives you stronger negotiating power when in discussion with an investor, stakeholder, buyer, or banker. Being able to provide evidence of value is key to gaining interest and attention because potential investors know how much is reasonable to invest.
The Benefit of Knowing Your Value
Failing to calculate your business’s value can be remedied by employing the help of a business appraiser or business advisor. The longer you wait to find the value of your business, the less time you will have to increase the value of your business. Knowing your business’s value in advance allows you to increase the value of your capital, such as cash flow and tangible and intangible assets, which will increase the value of the business.
Business assets refer to all the things your business owns and that have a value that can be shown on a balance sheet. Examples of tangible assets include property, building, equipment and vehicles, cash, supplies, and accounts receivable. Asset valuation considers the total cost required to start another business using the same assets.
There are two instances in which business assets can be valued. The first instance is as a going concern, meaning operating as usual, or as a liquidation in which assets are sold for cash. The liquidation value of assets will be less than the value of assets as a going concern. You need to include goodwill, or the intangible value of your business, in any business valuation. Goodwill valuation includes the business reputation, name recognition, customer loyalty, trademarks and trade name, skill employees, and specialty skills.
A great example of goodwill valuation is the social responsibility maintained by a business. Alamos Gold Inc. is a mining business with global operations that hold it accountable to the highest environmental, social, and governance standards. Being committed to social responsibility allows the business to build a legacy that benefits all stakeholders. Alamos Gold releases an annual environmental, social, and corporate governance report to outline its progress on performance.
Alamos Gold is a Canadian-based intermediate gold producer with three operating mines in North America. They have the Young-Davidson and Island Gold mines in Northern Ontario and the Mulatos mine in Sonora State, as well as developing projects in Turkey and the United States. The mining company employs over 1,800 people and is committed to the highest standards of sustainable development.
Cash Flow and Gross Sales
Potential buyers will want to know what type of cash flow your business is capable of generating. Cash flow analysis looks at the inflow and outflow of cash over a specific period. This valuation method is used when there are shareholders in a company. You can get a crude approximation of your business valuation by looking at multiples of gross sales.
Going through the financial close process and reconciliation of the business ledger can be time-consuming for your accounting team. The best way to streamline and build efficiency into the accounting process is to implement close management software. ReconArt’s cloud-based close management solution automates and speeds up the period-end close workflow by acting as a central dashboard for month-end close activities.
The financial close management software features a centralized dashboard for balance sheet account reconciliations, a fully auditable approval workflow, a checklist for month-end close activities, automation of the period-end certification process, and variance analyses. Financial close software is adaptive to changing business needs and can support the financial close automation process no matter how small or large your finance team is.
Seller’s Discretionary Earnings
Seller’s discretionary earnings valuation is used for smaller companies that have a single owner. The gross profit is reduced by different factors so that earnings can be calculated based on operating expenses. This includes income taxes, nonrecurring income and expenses, non-operating income and expenses, depreciation and amortization, and interest expenses or income.
The sooner you determine your business’s value, the sooner you can take action to increase its value and boost your negotiating power.