Quite often, multiples of profit are used as a Valuation model for companies. This method may be suitable for companies with several years of financial history. Price / profit (P / E) represents the company's value divided by its profit after tax. For example, if your company made a profit after tax of $ 100,000 and you were offered $ 500,000 for the company, that would equate to a P / E ratio of 5 (500,000 / 100,000). That equation is simple enough to calculate, but there is no standard P / E ratio that can be used to value all companies, but it differs between different industries and companies. Companies in certain industries, for example in IT, will usually have a much higher P / E ratio than companies in, for example, the construction sector. Companies where profits grow rapidly will also have a higher profit multiple than companies where profit growth is low. P / E ratios used for larger companies are often lower for smaller companies in the same industry. Because a small business can be dependent on few products and have a big impact on a founder or key person, buying a larger one means more risk than buying a larger company. With a small business, the market for the main product may disappear overnight, or the key executives may suddenly decide to leave the company. Should any of these scenarios occur, the company's profits would fall and could jeopardize the company's existence. A larger company with many different products and thousands of employees would be less affected by losing a key product or the departure of significant employees, but this does not mean that the profit needs to be significantly affected. The higher risk of buying a small company is therefore reflected in a lower P / E ratio. In general, valuations of smaller companies can end up between 4 and 10 times the annual profit after tax. More about company valuation in different scenarios
This method uses an estimate of the company's cash flow over a period of time. The company's "terminal value" is also calculated after this period has expired. The value of the predicted cash flow, plus the terminal value, is then discounted to give a current valuation. It can be difficult to determine an exact terminal value, as it is so heavily dependent on cash flow estimates. This valuation method can be used when a company has a lot of potential, but few assets and little financial history to speak of - for example, an online business. Industry valuations In some industries, when companies change owners regularly, industry rules of thumb are sometimes used to value a company. Examples of such industries include recruitment and accounting firms.
When calculating a business valuation, one or more of these valuation methods can be used. There are also a large number of other factors that can be considered - several of which are intangible.
It is obvious that a buyer can be more cautious when buying a business during a recession. During a boom, more companies tend to want to grow by buying other companies, and the conditions for financing a purchase are better during this period. With more potential buyers in the market, it is more likely that you will get a higher price when the economy is doing well.
Often such assets can be valued by using the original purchase price and using a depreciation calculation on each item. However, things are not always so simple, as some assets such as property may have risen in value since the original purchase. At the same time, other assets such as vehicles and special equipment can be much less valuable if you tried to sell them directly. Intangible assets Some of the most valuable parts of a business may not appear in any balance sheet - these may include brands, reputation, brand, key people and the size and quality of the customer base.
If a sale is forced, all valuation methods must be discounted to encourage a quick sale.
It may sound like a cliché, but a business is only worth what someone is willing to pay for it. Many small business owners are easily emotionally driven and often value their businesses at higher levels than a potential buyer is willing to pay. If you are seriously considering selling your business, it is worth being realistic about its true value before offering it for sale. Make sure you ask an expert to help you come to a realistic valuation - or answer any questions you may have when dealing with a potential buyer for your business. Experts in business valuations can be found here.