Simple Business Valuation

When starting your business, you will need to do some valuation of your company. This is typically done using two different approaches– qualitative and quantitative. Qualitative methods ask people about their perceptions of your company and what it means to them. These are then weighed against each other to determine if there are indications that your company has solid growth. Quantitative valuations use hard numbers such as earnings, revenue, expenses, etc., to come up with an estimated value.

A simple way to evaluate the price of your own business is through the cost/value ratio. The cost/value ratio compares the total cost of owning your business with the market worth of your business. By doing this, you can get an accurate estimate of how much your business is currently valued at and whether or not it is a good investment.

In this article, we will be looking at the costs of owning a general merchandise store and determining if buying a GMC franchise is a smart idea. We will also look at the current market values for similar franchises to give us an apples-to-apples comparison. Hopefully you will find this information helpful in making the best decision for you!

1. Costs of opening a general merchandize (GM) store
2. Finding out how much money you have available to invest
3. Choosing a location for your store
4. Legal requirements for running a business
5. Insurance requirements for having a business
6.

Three types of value

simple business valuation

The term ‘value’ in business is quite confusing. There are three different definitions for it, but they all refer to the same thing – how much money you stand to make or lose by investing in a business!

Value can be described as either internal (intra-organizational) value, external (extra- organizational) value, or financial value.

Internal value comes from within the organization- such as through growth opportunities, improvements to efficiency, or motivating and inspiring staff.

External value exists outside of the organization– things like market position, prestige, name recognition, and brand appeal. These benefits help draw in new customers or keep current ones.

Financial value refers to what an investor would pay for a company stock, debt, or asset. This includes both hard assets (like buildings and equipment) and intellectual property (IPs) like patents and copyrights.

Economic value

simple business valuation

The economic value of a business comes down to two main things – its market price, or what it sells for, and how much profit it makes.

The market price is simply determined by what other people are willing to pay for the goods or services that make up the business. This includes buying out shareholders, investors, or buyers who want to take over the company, and going up in sale.

Profits refer to the money left over after all costs have been paid. These cost include salaries for employees, marketing expenses, legal fees, and so on.

By looking at both these numbers together, you can determine whether the stock of a company is undervalued or not.

Financial value

simple business valuation

The most basic type of business valuation is called financial value. This is also known as market value or enterprise value. It’s very simple to calculate, but it doesn’t tell you how much money an entrepreneur would make if they ran their company efficiently and well. Rather, this number tells you what investors might pay for the rights to run the business themselves.

Financial values are sometimes referred to as “enterprise value.” That word may sound fancy, but it just means capital investment in the business minus depreciation. A lot of businesses lose value over time, so that cost gets subtracted from the initial purchase price.

In general, larger companies tend to have more expensive capital investments than smaller ones, so their EV is higher. But there are times when one company is really richly valued even though it’s not particularly profitable. (We’ll talk about why later in this article.

Operating value

simple business valuation

The operating value of a business is defined as its total net worth, which includes all of its assets minus all of its liabilities. Assets include things like equipment, real estate, and money in the bank. Liabilities consist of past due bills such as rent or loan payments.

By this definition, the operating value of a company can be thought of as how much money the company has access to spend on making the business run. Obviously, the more money it has, the better!

Net income (or profit) and cash flow are two important pieces of information that we look at when calculating operating value. Net income is the difference between what a business makes and its expenses, while cash flow means how much money a business has coming in compared to what it spends. Both these numbers influence the way we calculate operating value.

A common mistake people make with respect to operating value is to only consider the current year’s results. They will add up the values of all of the company’s assets and then subtract the amount of debt owed, assuming that both will keep rising over time. While this may work for some companies, it is not an effective method because you should also take into consideration trends in net income and debt.

If the net income stays the same but the debt rises, your operating valuation could become very inaccurate.

Comparable businesses

simple business valuation

The most basic way to value a business is to compare it with similar companies that are also run well and bring in enough income.

What is meant by “similar” in this context is determined mostly by what the owner of the company wants for their business. They may want more exposure, less exposure, or just as much exposure as other companies.

The numbers used to determine how much money your business could make an exit depend on two things: the market size and the price you sell yours for.

Market size refers to how many units there are of a product or service like yours and if they are growing or shrinking. If there are lots of them, then your business would be considered successful. And vice versa.

Price includes both the buying and selling price. So, if another company sold theirs for the same amount as you, your business would have the potential to earn the same amount per sale.

Business owners usually list their company online using websites and documents or even posting about it on social media sites. Reading through these documents and looking at pictures can help you understand what makes the business unique and strong.

Interviews with employees are also helpful to learn more about the workplace and how people work around each other.

Competitive conditions

A competitive business environment will sometimes make it difficult to find accurate information about your company’s value.

This is especially true if you are looking at market-value estimates for your own company.

It can also be tricky finding comparable companies that have been publicly traded or conducted an IPO, which usually offer more quantitative information.

But even when such numbers are available, they may not be totally reliable. This is because investors and shareholders typically expect significant discounts from fair valuation.

These discounts come in many forms, including:

Less than perfect corporate governance

No clear leader or vision

Too much bureaucracy

Unclear risk reward profiles

Limited product/service offerings

So trying to use these numbers as exact dollar values can be misleading.

What we can do instead is compare our company with similar ones in order to get a general sense of its value. We can then apply one of several different approaches to determine a price target.

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