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Every entrepreneur should know what their business is worth and business valuation is the most effective way to determine how much your business is worth. Accounting services in Edmonton will conduct a business valuation for you if you are looking to sell your business or merge your company. Here are three most commonly used methods to do a business valuation for your business.
The simplest way to calculate the value of your business is by counting the value of your hard assets. This is the resale value of your equipment, machinery, and other devices. However, this generally gives the lowest value of a company as the real value of your company is significantly higher due to other factors such as market value, liabilities such as debt etc. The difference between the market value of your company, or good will as accounting services generally refer to them as, and the liabilities will give the exact value of the company. Therefore, this method is not the most accurate method for business valuation of a company.
Discounted Cash Flow
This method takes into consideration the cash flow of your company by calculating the projected stream of profits that the company makes in the future. The steadier the cash flows of your business, the higher number of future returns they will be able to add up to. This also helps to calculate how much your business will be worth in the future. Once a buyer has an estimate of how much profit your business will make in the future, they can add a discount rate to calculate the actual worth of your company. This discount rate depends on the future worth of the company, the time value of money, the level of risk the investment is, and the cost of capital. The accuracy of this method relies on two key factors: how much profit your business is expected to make in the future and how precise those estimates are.
Accounting services in Edmonton utilize either of these business valuation methods and not both of them together. Assets are considered as a subset of profit generation if the discounted cash flow method is used and are not included separately.
Another common business valuation technique is to see the value of similar companies that have been sold recently or if their value is publicly listed. Companies in the same industry should be compared with another keeping in mind the difference in the value of a fortune 500 company and a small business. Annual industry conferences can shed some light on the value of companies in your industry and help you with your business valuation.
Accounting services in Edmonton use these basic valuation techniques to determine the worth of your business. Knowing the difference between them will help you understand the business valuation process better.