How to calculate the value of a company?

What is the use of knowing the value of a company?

Any entrepreneur needs to know how to calculate the sale price of his company. Even if you are not looking for the sale of your business, knowing how to value a company will help you manage it in a much more professional way.

Also, understanding the purpose of business valuation becomes important as your business grows and you need to raise capital, sell part of the business, or get a loan.

For investors, knowing the value of the company is a critical factor that allows determining the potential return on investment; while, for collaborators and employees, this information is of great interest to them if they have a share in its earnings.

Knowing how to calculate the sale price in the event of a transfer can be beneficial for both the seller and the buyer since a transaction at market prices guarantees that the former will obtain a profit and that the latter will recover their investment in a reasonable period.

How to calculate the sale price

Multiple factors influence the valuation of companies, from patents, machinery, human capital, and growth rate, to real estate, customers, contracts, and the state of the market.

In short, the price of a company is determined by its goodwill, which reveals whether it is profitable or not. Read carefully and know these five methods to know how to value a company professionally.

Book value – This method of valuation of companies is the easiest to calculate since it only takes into account the net worth of the company. To obtain it, the total assets of the company are considered (such as patrimonial assets, contributions from partners, retained benefits) and the liabilities (debts) are subtracted. This type of business valuation is recommended for those with high net worth.

Sales Multiple – Based on a calculation that is obtained by multiplying a company’s sales money by a specific coefficient. The latter is the result of an analysis of previous business activity and of competing companies, which makes it possible to extrapolate the valuation. It is suggested for technology companies that base their business on non-tangible factors.

Liquidation value – Obtained by estimating the sale of all the company’s assets at the market price at a particular time. This business valuation calculation does not take into account the cost prices of assets, but only their market value.

Value of profits – Known in English as PER (Price-to-Earnings Ratio), it is the calculation of the value of the company about the price for earnings, which determines the relationship between what is paid for each share of the business and the benefit they provide each year. This method is recommended for companies listed on the stock exchange.

Dividend value – It is the method of valuation of companies based on dividends per share, that is, the result of dividing each share of the company by the profitability required by the shareholders. The value of the company is calculated by multiplying the dividends by the total shares.

It is evident that there is no single method that tells us how to calculate the sale price of a company, everything will depend on the objective you have as an entrepreneur or investor, but remember that a well-valued company will guarantee high returns.

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