7 Tips for Understanding Business Valuation

« Back

Valuations provide business owners with multiple facts and figures regarding a business’ value or worth. Without a well-developed understanding of your business’ worth you are susceptible to losing money in a sale or missing out on profitable opportunities. Understanding your business stats and value is an essential component of being a responsible business owner. 

Keep reading to learn seven tips to help you better understand your business value. 

1. Calculate Discretionary Earnings

Discretionary earnings refers to the pretax income of a business before factoring in non-cash expenses and the owners salary. These finances, along with one time expenses, count as discretionary earnings and should not be factored into the owner’s value. 

2. Determine Assets and Liabilities

Assets are either tangible or intangible. Tangible assets have a defined monetary value such as cash, inventory, or an investment portfolio. Intangible assets, like patents and trademarks, can have a large impact on your SDE multiplier (​​Seller’s Discretionary Earnings) and overall earning potential. 

Liabilities are debt and other financial obligations that a prospective buyer would have to pay off. This can include notes payable, bank debt, or mortgages. Liabilities can affect a business valuation. 

3. Know Your SDE Multiplier

The seller’s discretionary earnings (SDE) is a calculation of the total financial benefit that a full time owner would get from a business on an annual basis. This measure is computed for small to mid-sized businesses that takes into account earnings and subtracts interest, taxes and depreciation. 

Businesses typically sell for one to four times their SDE. This multiplier can help determine the value of a business in the near future. If your industry is showing growth the multiplier will increase the value of your value. 

4. Write Off Less Taxes

When entrepreneurs seek out tax write-offs they actually lower their reported profits. When you pay more taxes, potential buyers can review a higher profit based on public tax returns. Some reports even say tax write offs can actually cut your value every two to three times what you are writing off.  

5. Compare Yourself to Other Industry Players

When it comes to determining the value of your company, you need to assess how your business stands against industry competitors. When you compare yourself to other organizations you will understand where your business sits in the marketplace. The value of your business is directly tied to the success and failure of competitors and the industry as a whole. 

6. Use Professional Tools 

Enlisting professional help can help you assure that you have an accurate business valuation. Online calculators and business consultants can be worthwhile investments to determine your business’ valuation. Professional tools can be used to conduct a business audit and trim the fat on your business. 

7. Make Realistic Projections

When you are determining your business value it is necessary to be clear about how your business generates venue and will continue to grow its profits. You can add value to your business by updating your business model and launching an aggressive marketing campaign. 

Understand Your Business Value 

As a business owner it is necessary for you to have a deep understanding of what factors contribute to a business value. Your value will change over time, so it is important to routinely perform a business valuation.

Our new product Solomon’s Picks publishes reports on companies with undervalued stocks that are poised to expand exponentially. We look at business valuation and many other factors to arrive at a stock pick or Solomon’s Pick.