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Determining Business Value: Methodologies and Key Factors

While important, not all businesses have value. In fact, business value is very important to improve and differentiate your brand from others. However, determining business value is also not an easy thing.

Here’s a brief explanation of what you should consider when determining business value!

What is Business Value?

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Broadly speaking, business value is divided into 2, “monetary” and “non-monetary” business value.  “Monetary” business values such as profits, business assets, stakeholders and others. While the “non-monetary” business value is customer awareness of your business or brand, trademarks, and so on. 

Methodologies for Determining Business Value 

The 2 concepts of business value above are of course very different from one business to another. Well, to determine the value of a business that suits your goals, here are some methods you can use!

1. Asset Valuation

In this method, you have to analyze 2 types of value of your business. Determining business value with this method, you must calculate all inventory, assets, cashflows, and the business relationship with your customers (because this is also one of the company’s assets). 

2. Time Revenue Methode

Determining business value with this method you have to calculate how much revenue the company has at a certain time and multiply it by a certain number according to the state of the economy and the industry. 

3. Earnings Valuation (Future Profit)

This method of determining business value can be done when you want to see potential future profits. This method itself analyzes sales, profits and expenses, and gross profit from the past 3 years and the final result is your business’s future maintainable earnings.

4. Discounted Cash Flow Valuation

In contrast to the above method, determining business value through Discounter Cash Flow Valuation is done when you see that business profits will not be stable in the future.

 In this method, you have to analyze the estimated net cash flow business in the future and discount it according to the value in the present. This method can help you maintain the value of your business in the future.

5. Relative Valuation

Slightly different from other methods of determining business value, relative valuation is done by comparing the value of your business assets with other similar assets. Until you find the right price. 

Key Factors in Determining Business Value

In addition to the above methods, there are several key factors that can influence the process of determining business value. Here are some things you should pay attention to!

1. Economic Conditions 

As we know, the world has changed a lot since COVID. The pandemic has also shown us that there are so many things you can’t control, especially when you’re building a business.

Even so, as a business person, you still have to pay attention to trends and the economic environment of your business. Starting from inflation, recession, and future opportunities, to technological developments.

2. Quality of Human Resources

Equally important in determining the value of a business besides profit is your team.

Businesses are started by people and driven by people too. Make sure your business has a strong team that matches the business values developed (both “monetary” and “non-monetary). 

3. EBITDA Multiple

One (of) the single most important factors determining business value is EBTIDA multiple. The EBITDA multiple is determined by various valuation factors, serving as an indicator of the buyer’s level of dedication, the attractiveness of the company, and the robustness of the overall market.

At this point, have you found a suitable way of determining business value? Need more information on similar subjects? Click on our newsletter and subscribe below!