If you’re considering selling your company, it helps to understand methods of calculating value to ensure you get the best price. Some of the simpler methods discussed here involve considering the company’s market capitalization (based on issued shares and share value), analysing historical sales of comparable companies, or using industry-wide multipliers to determine market value.
METHOD 1 – Calculating Market Value Using Market Capitalization
The simplest and most reliable method to determine a company’s market value is to calculate its market capitalization. The market capitalization is defined as a company’s share value multiplied by the total number of shares issued. This method is used as a measure of a company’s overall size.
This can be determined by checking the share price information made publicly available by the stock exchange.
This information can also be found through the stock exchange or through an online search of the company. Information on the number of shares issued is publicly available.
This figure represents the total investor value in the company, giving a fairly accurate picture of the company’s overall capital value.
Xero’s share price at the time of writing (11 July 2017) was $25.75. The number of issued shares was 137,826,238.
$25.75 x 137,826,238 = $3,549,025,628 (market capitalisation)
METHOD 2 – Finding Market Value Using Comparable Companies
This valuation method works well if a company is privately held. To estimate a company’s value, look at the historical sale prices for comparable businesses.
There is some discretion involved in choosing which businesses are comparable. Companies considered should be in the same industry, be roughly the same size, and have similar sales and profits to the company you want to value. In addition, the business sales should be recent so they reflect more or less up-to-date market conditions.
After identifying recent sales of comparable businesses or valuations of similar, publicly-traded companies (usually 3 as a minimum), establish an average sale price. This average value can be used as a bench mark for the market value of the company in question.
METHOD 3 – Determine Market Value Using Multipliers
The most appropriate method for valuing a small business is the multiplier method. This method uses an income figure, such as gross sales, gross sales plus inventory, or net profit, and multiplies it by an appropriate coefficient (multiple) to arrive at a value for the business. This type of estimate is best used as a rough, preliminary valuation method because it ignores many important factors in determining the actual value of a business.
Generally, valuing a business using the multiplier method requires annual sales figures, gross profit figures, net profit figures and the values of tangible assets and current stock.
The coefficient (multiplier) used will vary based on the industry, the market conditions, and any special circumstances within the business. The reliability of the multiplier can be somewhat arbitrary depending on who you consult, however a market based figure can be obtained from your trade association or from a business broker/appraiser.
Once you find the financial figures needed and the appropriate multiplier, simply multiply the numbers to find an estimated value for the company. Again, keep in mind that this is a very rough estimation of market value.