What is my business valuation? This is a question that every business owner or director should be across even if they have no planned exit in mind as yet. A business valuation is never a definite figure, but can be used as another measure of the relative health and performance of a business. Remember, that the only true value of a business is that figure which a controlling entity is prepared to sell it for, and one in which a buyer is prepared to pay for it.
Your business value is an indicative measure as to the health, performance, and future ability for the business to generate profitable returns. There are a number of different measures of valuation. Jazoodle’s proprietary calculation assesses the consistency of earnings over time, as well as growth amounts and compares this to the net asset value of the business. In early stage companies, the earnings history may not reflect value within the business. In this case, we also assess the assets that have been built within the business
What does it mean?
Your indicative business value is as per the end period of your financial records based within Jazoodle. It must be noted that there are many factors that may go into deciding what a business is worth. Outside of the financial numbers, a business may provide a strategic value add to another business, for instance, controls a critical piece of a supply chain. The value to the buyer in this case, may be very different to the calculated value of the finances.
Outside of this, Jazoodle’s premise of business valuation is simple. How consistent have earnings been within the business over time, and what level of growth are seen in this period. For a business with volatile earnings, we cannot be confident that those earnings may continue into the future, thus, put a lower level of earnings multiple on the business. We also assess the cost of capital and use a discounted future value calculation. Where earnings may not be consistent, but a strong asset base is present, we may use the net asset value of the business in our calculations instead.
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How do we derive your Business Valuation?
Your valuation is derived by:
- Assess the net asset value of the business
- Assess earnings history
- Define volatility of earnings
- Based upon volatility, assign a multiple of earnings
- Assess weighted average cost of capital
- Apply multiple to future years’ earnings and sum
- If net asset value is greater than discounted future earnings, then use net asset value method
How Can I Improve my Business Valuation?
Your Business Valuation can be improved in a number of ways, including:
- Increase profitable earnings
- Reduce earnings volatility – apply a strategic approach to your market
- Invest in assets that increase the asset turnover value
- Reduce expenses in line with business needs
- Implement internal efficiencies (training, policies, workflows) for more profitable trading