The value of any business depends on the financial return offered by the business over time.
You first need to forecast the business profit (surplus) over a period of time, say three years. A useful method of doing this is to start with current performance then consider future changes in internal and external factors and their impact on business performance. This includes market size, competitor activity, and changes in cost drivers. If you will be working in the business you must deduct any earnings (salary/wages) you could have secured over the period if your time and skills where not committed to the business. The result is the return from your financial investment in the business over the period. This can be converted to the annual average business return by dividing by the number of years i.e 3. Next you must determine an acceptable percentage return for your investment considering the risk and alternatives available.
A simple means to calculate the business value from here is to divide the annual average business return by the acceptable percentage return (remember 10% is actually 0.1). The result is the business value.
A Business Valuation Model built around this approach is available for free trial at bizpeponline.com. It provides full guidance to establish performance forecasts and determine a business valuation.
