Evaluation of an online and real-time business involves diligent steps of appreciation of different assets. These assets need to be compared against debts, credits and other financial liabilities to estimate a genuine net business worth. There are tangible and intangible factors in a business that need to be considered before valuation, factors like brand name and human force should also be kept in mind during the evaluation.

The aim of valuation is to guide the seller and the buyer to determine a reasonable price of a running business. A real-time functional worth can be achieved based on a comparison between market value and asset values.

Practical steps for calculating business worth

Following are some time-tested methods to avoid errors and reach a holistic evaluation based on practical knowledge:

Step 1: Reassessment of the balance sheet:

The balance sheet should allow a clear picture of the estimated worth of the business. In simple words, assets plus liabilities is equivalent to the stockholder's equity. Any amount of profit gained from the left over assets’ sale for paying debt is equally distributed among the stockholders. Reassessment will help you gain ground on exact figures.

Step 2: Get a real value chart:

It is of major importance to evaluate current business assets. Do not forget to include equipment, accessories and inventory. These assets should be valued at substitute charges. It will help you assess and work on the real value of tangible business assets on board. This is a realistic and required step for calculating the worth of your business.

Step 3: Deduction of financial liability:

Calculate all the major and minor liabilities, including loans, credits and debts, as outstanding and operating leases from the replacement costs for total assets. This will be your book value of the business, excluding the market value. An accurate book value should help you to reach an independent figure based on all the liabilities.

Step 4: Evaluate the revenue multiple:

Revenue multiple is industry specific and generally calculated on the potential of the company in selling three to four times the current annual sales. If your business has the potential of growing rapidly, it adds to the value. You can find sales multiples in any current investment analyst report. Multiply this multiple by the sales in your company to get a business value built on current revenues. This should give an average for comparison.

Step 5: Determine earnings multiple:

Revenues are significant, but businesses work on a good earning model. Determining earnings multiple is an important step as it will help you to use earnings before interest and taxes (EBIT) as a check for comparison. Both revenue and earnings multiples can be found in investment analyst reports. Multiply the earnings multiple by the EBIT. A realistic figure of the business worth can be achieved using the current earnings.

Step 6: Evaluate cut-rate on cash flows:

Another important step includes estimating the projected cash flows of the business-back at a discounted rate. It is a common practice followed by analysts to use the long-term Treasury bill as the interest rate. You can perform this calculation in MS Excel or any financial calculator using the net present value (NPV) formula. If it seems difficult, seek the help of a financial advisor for help with accurate projections.

Step 7: Final Analysis:

Evaluate the data. The equation is simple. The business with highest book value, revenue and earnings multiples plus NPV is the business with the highest worth. You may want to consider buying the business, and for sellers, these factors will lead to fixing a good buying rate.Finally, remember that the asking price for any business is not the same as purchase price. A buyer’s valuation is sure to be different from what the seller believes is the business worth. They usually factor their years of hard work into their price calculation. In reality, it has no business whatsoever being in the equation. Evaluate the value impartially based on sound practices and principles, and gain insight into the real worth of a business.