When it comes to determining the value of your company, there are a lot of small business valuation tools and terms you need to know ahead of time. We’ve compiled a list of the most popular words and concepts that you need to know for a successful business valuation.
Balance sheet: Summary of a business’s financial status at a set point in time.
Book value (also known as net book value): Total assets including amortization and depreciation minus total liabilities.
Current ratio: Used to determine how financially solvent a company is, the formula for current ratio is total current assets/total current liabilities.
EBITDA: Earnings before interest, tax, depreciation and amortization. It’s one of the common business valuation tools that measures performance without having to factor in financing or accounting decisions.
Discount rate: Rate of return used to convert future cash flow into present value.
Equity: Owner’s interest in business after liabilities have been deducted.
Goodwill: Any potential future economic benefit that would come as a result of the business or its interest.
Liquidation value: What the business would be worth if it closed its doors and assets were sold off individually.
Marketability (also known as liquidity): How easily an asset can be converted to cash.
Market value: The average estimated amount that an asset or liability is worth if it were to be sold on the day of valuation.
Net working capital: Your current assets minus current liabilities.
Present value: The value of future cash flows or payments discounted to the value at the current date (using the above mentioned discount rate).
Quick ratio: Used to determine a business’s liquidity, the formula for quick ratio is (current assets – inventory)/(current liabilities).
Rate of return: Amount of income or loss that an investment is anticipated to bring in, as a percentage of that investment.
Valuation approaches: In terms of business valuation tools, there are two main approaches you need to know. The valuation income approach converts future cash flows into a single present value whereas the valuation market approach determines value by comparing your assets to identical ones in the market.
Yield: Return on investment, often expressed as a percentage.
Having the right terminology and business valuation tools is key in determining the proper value for your company. It’s important to be as prepared and knowledgeable as possible throughout the process.