How To Value a Business…
How much is my RTO worth?
Although there are several formulas you can use, there are no black-and-white answers on valuation techniques. Conduct your own research, then get independent advice from a business valuer or broker.
By using several valuation methods and comparing numbers, you can cross-check your calculations and get a better idea of your business’ value. Here are four of the most commonly used methods.
- Method 1: Asset valuation
- Method 2: Capitalised future earnings
- Method 3: Earnings multiple
- Method 4: Comparable sales
- Add up the value of all the assets such as cash, stock, plant and equipment, and receivables.
- Add up liabilities, such as any bank debts and payments due.
- Subtract the business’ liabilities from its assets to get the net asset value.
- Work out the average net profit of the business over the last three years using its profit-and-loss statements. Adjust the profit for any one-off expenses or other irregular items each year.
- Decide on the annual rate of return a buyer might be looking for. There are no hard and fast rules about the number to choose, except higher risk should give higher returns. Compare the business with other investment opportunities — from safe havens like term deposits, to riskier investments like shares. Also look at the rate of return that similar businesses in the same industry achieve.
- Divide net profits by the rate of return to determine the value of the business, then multiply by 100.