Having a strong and proven business valuation is a good indication that a business is growing and headed on the path to success. Professional business evaluators are usually hired by big companies to determine the value of a business and typically use several methods to arrive at a conclusion. These evaluations can be done at various stages of development of a company for various reasons that are most often related to investment decisions, exit plan strategy, selling the business, a buyout, or an IPO. Business owners, economic analysts, and investors utilize business valuations to determine the value of a company, and here are five common methods that are used today. According to neumannassociates.com, buying or selling a business ought to be driven with the company's valuation in mind while taking into account the overall cash flow, yearly profits, overall asset ownership, and projected future earnings.

Evaluating Your Assets

The first step is to consider what your business owns in terms of tangible and intangible items. This can include how much money is sitting in your company's bank accounts, equipment, inventory of goods, real estate properties, stocks, patents of a product, trademarks, including customer relationships and client-base. These are most if not all of the items that will provide a good chunk of your company's valuation.  

Track Record of Profit

If you are pitching a business valuation to a potential investor, showing a proven track record of your company's profits per quarter and per year since the founding of the business is essential. For potential investors, this will let them know how consistent the company is in making a profit after all other expenses are paid. If your business has a difficult time bringing enough income to pay the bills, its valuation decreases. Therefore, paying everything your business owes and maintaining a positive cash flow will improve the overall business valuation.

Comparative Valuation

A comparative valuation is used to determine how much another business is worth in the same industry that you are in and that sells similar products and services as you do. This method is most often utilized to compare the assets of your business to the assets of another similar business to determine a reasonable asking price for an investment or company exit. 

Project Future Earnings

The projected revenue of your business also determines its current value of the business today if an investor or business analyst were to look at the projected sales. The future maintainable earnings valuation method is utilized in future earnings evaluations and takes into account certain criteria such as sales, business expenses, profit over the past three years. Analyzing these figures can help you project future success and give your business a current value. 

Current Cash Flow of the Business

What amounts to big profits at the end of each year is the amount of cash flow your business is generating from the sale of products, services, and other business dealings. This can be calculated month by month or on a quarterly basis to determine how much cash is being generated. Cash flow is one of the most essential criteria investors and business analysts use to come up with a business valuation.