How Much Is My Company Worth?

"Online fashion store raises S$20 million...", "F&B company acquired start-up food chain for S$15 million...",... you would have seen news more than often nowadays with moolah pumping into infant, young or even mature companies. Have you ever thought if your company (or part of it) were to be put on sale, how much would you actually get?

Value is surely defined mainly by the dollar sign but to get to that dollar, there are too many ways to go about it. In this article, we will focus on those simplest methods so to benefit most who wish to get some sensing in the quickest way.

1) Net assets (plus premium)

One of the safe estimates to value your company can be to look at the net assets (assets minus liabilities) in your company. Some key items you can probably think as a start are these: Cash + Accounts Receivables + Deposits + Inventory + Property, Plant & Equipment - Accounts Payable - Other Payable - Debts.

These net assets in layman term would be your company's 'net worth' and buying or being bought at this value for the buyer as in a worse case scenario if the company is not performing well, the buyer can technically get his / her money back by selling all the assets and repay all the liabilities. The seller would usually ask for a premium (or 'goodwill') to compensate for other intangibles like existing networks, brand value, etc. which could help to derive future revenue and this is usually determined through negotiations between buyer and seller, industry's standards, etc. or sometimes worked backwards based on (2) below.

This method typically allows you a quick insight into the value of your company but if you are looking to buy a company, the reliability of the underlying figures is a key factor a buyer should definitely dig into.

2) Multiplier of earnings

This method would be what you more commonly hear as 'price-to-earnings' ratio. The key purpose is to have an idea of how much your company is worth through a multiplier applied to your latest full financial year earnings (profit after tax). This multiplier, a factor of how much the buyer is willing to pay for $1 of earning, is usually narrowed to a range (and sometimes a large range) by industry standards and the ultimate multiplier would then be through deeper comparisons with competitors, reasonableness, negotiations between buyer / seller, etc.

This essentially also tells the buyer the number of years required for the earnings to break-even with its invested amount on a high level basis. However, companies out there on a 25x, 30x price-to-earnings ratio would not have investors thinking to only recoup their investments in 30 years. Fundamental factors like brand equity and potential future growth of the company are usually already factored into this multiplier.

3) Discounted cash flow

Method 1 and 2 focus more on understanding your company's value with current numbers whereas this discounted cash flow method focuses more on the future cash flow expected from the company. The idea is to have a projection of future cash flows, adjusted to net present value by considering inflation, financing costs and so on. There is no hard and fuss rule over the number of years to project where typically a company would project till the year which the company is expected to reach a constant growth stage or the peak of growth (and this could be three to ten years or even longer depending on the company). Unless you have an in-house finance professional, company looking to adopt this method would usually need to hire a professional valuer to compute the value.

You would realise by now that even if determining the value of your company is backed by numbers, there are certainly some degree of 'art' involved in the valuation of your company. Nevertheless, at every point of building our business, it is surely good to have a think about the value of your company to get a sense check of your progress or work towards a funding / exit strategy and you need not be alone in this whole process. Have a chat with us on how we can evaluate your company's value or tailor one strategy to beef up your valuation for your business, at fraction of cost.