Sooner rather than later you will be faced with the prospect of calculating the value of your SEO business – your company’s worth.
It doesn’t matter whether you know how to estimate the worth of your business or not when the situations arise you’d be faced with that task. Wouldn’t it make sense then to get acquitted with these four simple steps you can take to calculate the economic value of your business?
There are several reasons why you may have to place a cash value on your business, some of which include:
- If you’re in the market to sell the business
- You’re trying to bring in investors
- If you plan on selling some of your company’s equity
- You’re interested in understanding your business’s performance and growth outlook.
- Or perhaps you are planning to take out a loan against your business
You see, these are probable scenarios that may arise during your career which would require that you have hard data about your company’s value.
Now, we’ve established you need to know in concrete terms the business value of your organization, how do you go about it? What steps do you need to follow in evaluating your business value?
Calculate the Seller’s Discretionary Earnings (SDE)
Seller’s discretionary earning is the net pre-tax earnings of the business before the outflows or expenses that are not expected to continue after the sale of the company is complete.
The thing is most business owners claim tax deductible expenses in the hope of lowering their tax burden. Hence, using income statement filed on a tax return when determining how much revenue the business generates, will lead to grossly underestimating the actual numbers generated.
To get a better idea of how much the business generates add back the expenses listed on the tax return as tax deductibles which are not essential in running the business. Like the owner’s salary, a one-time cost that is not expected to recur after the sell, non-cash payments, interest repayments, etc.
Determine an SDE multiplier for your business
Now, in this next step, you’re trying to estimate how long your business is going to be running. You don’t expect your company to be out of business right? The SDE multiplier depends heavily on your industry’s growth trend and your geography. It’s a rule of thumb however, for small businesses to have multiples within the 2 to 10 range.
Apart from the industry growth outlook, checking what multiplier a competitor was sold for will also give you an idea of what number to settle for.
After determining your multiple, multiply it by your net profit or SDE.
Take into account the Assets and liabilities of the business
Finally, it’s time to account for the assets and liabilities not captured in the SDE. The assets include both the tangible like cash on hand, cash receivables, products available and intangibles like trademarks, patents, and goodwill. The current business liabilities may consist of debts or other obligations due in the future.
The final step in valuing your business is to do the actual math. Here’s a simple formula you can use:
Business Estimated Value = SDE* Industry multiple + cash on hand + Real Estate + receivables + other assets not in SDE multiple – Business liabilities
There you have it; however, it’s important to bear in mind that the actual market value of your business is the amount investors/buyers are willing to pay for it.