What Is A Simple Way To Value A Business?

The concept of business valuation has become more elaborate as companies have larger amounts of money invested in them. There are many different ways to value a business, and most are very complicated.

That is why this article will go into great detail about what is considered to be one of the simplest types of business valuations — market-based values.

Market-Based Valuation

Not only are these prices easy to find, but also there is no need for too much mathematical theory behind them. That means that anyone can do it!

There are just a few things you should know before doing a market analysis though. These tips will be discussed at length later on in this article.

Calculate the amount of revenue the business generates

what is a simple way to value a business

Valuing a business means determining how much it is worth, typically by calculating its market value or what someone will pay for it.

The most common way to calculate market value is to find an average cost per unit sold and then divide that number in half. This method underestimates the true value of a company with high profit units or low unit sales.

By adding together all of the revenues the company earns, you get total gross income. Then you subtract costs to arrive at net income. After accounting for debt, investment returns and equity value, we are left with the firm’s intrinsic (or “true”) value.

Intrinsic value is simply the sum of the parts of the business multiplied by the price per share. In other words, it is calculated by multiplying the earnings potential of the firm by the current share price.

Multiply the two

The simple way to value a business is to multiply the two numbers together. This method assumes that there are no significant non-monetary benefits of owning or investing in a business, such as financial freedom, prestige, etc.

The personal net worth calculation ignores these costs because they don’t affect your overall wealth. By calculating only the monetary value, this formula removes any bias towards individuals with larger homes, private jets, and other assets beyond what most people have.

By using this valuation technique, you can determine the true market value of a business by adding up all the cash flow it generates and then subtracting its cost. This includes expenses related to running the business as well as capital expenditures like buying new equipment.

This article will help you do just that! Read on for our easy to follow steps to value a business.

Divide by the number of years you've owned the business

what is a simple way to value a business

The easiest way to determine how much money you can get for your company is to divide the value you have found via our simple process by the length of time you have had it.

The longer you own a business, the more valuable it becomes. This is an important factor in determining its price tag.

Business owners who are looking to sell often take into consideration the prices that others have paid for similar businesses.

But what about investing in other ventures with the hopes of turning a big profit?
That's smart!

In fact, it's the very reason why many people begin their journey towards owning a business – they hope to make enough profits from running another business so that they can invest in their dream business.

A lot of people will start a business just because they want to reap the benefits of running one.

Calculate the market value of the business

what is a simple way to value a business

The most common way to determine the value of a business is by calculating its market value. This is also referred to as enterprise valuation or investor valuations. Market values are determined via two main components – price per share and net profit.

The price per share comes from how much one can pay for an individual stock ownership in the company. By looking at the prices that several companies have sold their shares for, you get an average cost per share. Then, those costs are adjusted up or down depending on whether the shareholders agreed to sell their shares to you or not!

Net profits are what the business made during a specific time frame. These can be monthly, quarterly, or yearly. When multiplying these together, it gives us an overall measure of the worth of the business. This calculation is then adjusted down for debts and other liabilities.

There are many different ways to calculate both price per share and net profit. Some use weighted averages, while others do not. No matter which method you choose, make sure to check out some solid resources for guidance.

Multiply the market value by the amount you want to get as a return on investment (ROI)

what is a simple way to value a business

The easiest way to determine the fair market value of a business is to multiply its market value by its ROI.

The market value of a business is simply determined through an online listing or research conducted by talking with people who have knowledge in the field. Once this information has been gathered, then prices can be compared and assessed for accuracy.

By doing this, we are able to arrive at what the market considers the price of the business.

The difficult part comes next – determining how much money you need to invest into your career/business so that it will pay off. This is where the ROI comes in!

If you want to keep the costs low, you can choose to use our simple valuation method mentioned above. It does not require too many resources and anyone can do it.

This article will help you learn more about the basics of business valuations and how to apply them to your business.

Subtract your debts

what is a simple way to value a business

A common way to value a business is by subtracting its debt from the total net worth. This method assumes that companies with less debt are more financially stable than those who are heavily indebted. By this calculation, the healthier company has higher valuations.

The problem with this approach is that it doesn’t take into account whether or not the debtor will be able to pay off their loans in future. It also ignores any possible negative impacts of paying down debt, like lower returns on investments or reduced spending on other areas of the business.

By ignoring these factors, this method can artificially boost the valuation of companies with lots of debt.

This article will go over some alternative methods for determining the market value of a business, but first we must discuss why using debt as part of the equation isn’t ideal.

Multiply by 1.5 to get the approximate annual return on investment

what is a simple way to value a business

While many approaches to business valuation have their place, there is one approach that most experts agree on. This method multiplies the value of the company by 1.5 to obtain an estimated market or “fair” price for the stock.

The reason why this method works is because it calculates what the market would pay for the company if they were buying it – not investing in it, but selling it.

By using this calculation as a benchmark, you can determine whether or not the current share price is fair. If the price is below the calculated average, then investors are willing to pay less than what the company is worth, making shareholders undervalued. On the other hand, if the price is above the average, then people are paying more than what the company is worth, creating overvaluation.

It is important to remember that past performance does not guarantee future results, even for similar companies.

Pick a number that you think is a fair return on your investment

what is a simple way to value a business

The easiest way to determine what a business is worth is to pick a number and go from there. It’s easy to say “I would like to buy this business for x amount of money,” but throwing around numbers can be tricky.

It takes time to assess the value of a business, so it’s best to make an estimate at first and then revisit the price later. By doing this, you will have time to evaluate whether or not the initial cost was too high!

Some key things to consider when determining the value of a business are: current market conditions, how well the company is performing in its present state, past investments/expenditures, as well as future projections. All of these factors should be weighted equally to create a neutral balance to build off of.

By having a balanced view, you ensure that no element dominates the process and thus false conclusions are avoided. When calculating the value of a business, also remember that depreciation can add significant weight to the final figure.

About The Author

Tiara Ogabang
Tiara Joan Ogabang is a talented content writer and marketing expert, currently working for the innovative company juice.ai. With a passion for writing and a keen eye for detail, Tiara has quickly become an integral part of the team, helping to drive engagement and build brand awareness through her creative and engaging content.
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