You can determine the value of your company in different ways. Asset value, productive value and a value based on the operating margin are the most common of them. Use the adjusted financial statements in the calculations. You should also take into account the intangible assets of your company when assessing its total value.
When you determine the value of your company, you should first review the factors impacting its business operations and success. For example, consider how market developments, the position of your company in the market and the choices made by its senior management impact your company's growth prospects.
After this, review the profitability, financial situation and assets of your company using the financial statements as a basis. Estimate the future prospects of your company on the basis of your analyses and financial statements. This provides you with the basic facts for determining the value of your company.
Asset value, productive value and a value based on the operating margin are the most common ways of calculating the value of a small company. Other options include the free cash flow method and the value based on comparable sales.
Remember that in addition to calculation-based values, goodwill also contributes to the value of your company. It comprises the skills of your personnel, the reputation of your company, patents and other intangible assets.
Valuating a company is a complex process and in most cases, it should be left to professionals.
The asset value gives the amount of debt-free assets owned by your company. The simplest way to calculate it is to deduct the debts of your company from its assets.
When calculating the asset value of your company, use the adjusted (and not the official) balance sheet as a basis. In that case, the asset value gives a better picture of the fair market value of your company’s assets.
Note that even though the asset value is often used as the minimum price in business acquisitions, it is rarely the same as the final sales price. This is because most business acquisitions also involve much more than the tangible assets of the company. The intangible assets of your company may be of extremely high value even if it is difficult to set a price for them.
In other words, the asset value usually underestimates the value of a company, especially if it is profitable. A valuation that is only based on asset value is best suited for a loss-making company or a company that is winding down its operations.
The productive value is based on an estimation on the company’s performance in the coming years under the new ownership. Be as realistic as possible when calculating the profit and loss forecast and use your company’s average past performance as a basis.
When preparing the forecast, use your company's profit and loss accounts for the past three years that are adjusted to reflect the normal situation. This helps to make the productive value more accurate that would be the case if you used official profit and loss accounts. Remember also to convert the profit estimation based on the profit and loss accounts so that they reflect the current value. The imputed productive value of your company is the result.
You also need other information for a more accurate productive value. The productive value depends on such factors as market trends in the coming years, how the company will support the new owner's business, and how the new owner will develop the company. You can already take these matters into account when converting your profit and loss estimates into current value..
You can also estimate the sales price of your company on the basis of the imputed productive value: the buyer should be able to repay the sales price with the income generated by the company over the next two to five years.
If your company is a small one and its balance sheet total is at sectoral average, you can also determine the value of your company on the basis of its operating margin. Operating margin is the amount of funds available to your company after you have paid all business-related expenses.
When determining the value of your company using the operating margin, first calculate your company's average operating margin for the past three years. When making the calculations, use the financial statements adjusted to reflect the normal situation. Then multiply the average operating margin by a figure between three and five. The size of the multiplier depends on such factors as the sector in which your company operates, the company's growth prospects and the fluctuations in yearly performance.
The calculation will produce a rough estimate of your company's value. Note that even though the calculation is partially a result of forecasts, it is nevertheless based on figures describing past performance. The basic assumption is that your company will continue to perform more or less in the same manner as in the past.