How to Determine the True Value of Your Business

Many business owners assume valuation is based purely on revenue or profits, but the reality is far more complex. Business valuation considers a range of factors—including assets, liabilities, market conditions, and future growth potential—to determine an accurate estimate of what your business is worth.

But valuation isn’t just about preparing for a sale. It’s a critical tool for business strategy, succession planning, and financial decision-making. Let’s dive into what goes into valuing a business and why it matters.

Business valuation isn’t just for companies planning to sell. Understanding your business’s worth can help with:

• Strategic Growth Planning: If you know what drives value in your business, you can focus on strengthening those areas.
• Attracting Investors: Investors want to see a clear picture of your financial health and potential return on investment.
• Succession Planning: If you plan to pass the business on to a family member or key employee, knowing its value is crucial.
• Mergers & Acquisitions: A proper valuation ensures you’re negotiating from a position of strength.
• Personal financial planning: A substantial part of a business owner’s net worth is typically their investment in their business. Understanding the value of the business can assist in retirement planning and diversification.

Even if you’re not planning to sell, knowing your business’s worth can help you make smarter decisions about growth, investment, and risk management.

1. Revenue and Profitability

A company’s revenue, profit margins, and earnings before interest, taxes, depreciation, and amortization (EBITDA) play a huge role in valuation. A business with consistent revenue and strong profit margins is generally valued higher than one with fluctuating income.

2. Market Conditions & Industry Trends

Your business doesn’t operate in a vacuum. Industry demand, economic conditions, and competitive positioning all affect valuation. If your industry is growing and your company is well-positioned, your valuation will reflect that opportunity.

3. Assets & Liabilities

Business valuation considers both tangible assets (such as property, equipment, and inventory) and intangible assets (such as brand reputation, intellectual property, and goodwill). On the flip side, debts and liabilities can negatively impact a company’s worth.

4. Growth Potential

A company with a scalable business model and strong future growth potential will have a higher valuation. Investors and buyers don’t just look at where you are today—they look at where you could be in the future.

5. Cash Flow & Financial Stability

Steady cash flow and a strong balance sheet indicate a financially healthy business. Buyers and investors prioritize businesses with predictable revenue streams and low working capital requirements…

There are several methods for valuing a business, and the best one depends on your industry, size, and goals. Common valuation approaches are:

• Market-Based Valuation: Compares your business to similar companies that have been recently sold.
• Income-Based Valuation: Focuses on revenue, profit margins, and projected future earnings.
• Asset-Based Valuation: Evaluates the total value of your business’s tangible and intangible assets.

For many businesses, a combination of these methods provides the most accurate valuation.

If you’re considering a business valuation for selling, acquiring, or securing investment, the process can be complex—but it doesn’t have to be overwhelming. Froehling Anderson’s valuation experts can provide a customized valuation that reflects the true worth of your business and helps you plan for the future with confidence.