One of the rules of thumb is that before investing in a small business, you should use a total value formula to determine its business worth and cash flow so you can know whether it’s worth purchasing partly or wholly. However, the total value of a business varies, depending on what aspects any new owner is looking at and your preferred business valuation method. Therefore, you need to consider the true worth of the business in question from multiple angles to get a 360-degree view of it.
One way to analyze the total company value or cash flow is by looking at its balance sheet. This will enable you to access the information of companies regardless of whether they are private or publicly traded. That said, you can also look at the market performance of a company.
Below are some of the business valuation methods you can use to calculate an organization’s total value equations.
Book Value of a Company
According to Investor.gov, a business’ book value, or net asset value, is the sum of all its assets minus its liabilities. It represents the company’s equity, or what would remain after it is liquidated, including real estate.
Small business owners can get an idea of a company’s book value by looking at the stockholder’s equity section in the financial statements. Just add up all the line items under that section, like retained earnings and contributed capital, and you will obtain the business’ value.
Alternatively, you can use the total value formula:
Book Value of a Company = Total Assets - Total Liabilities
Remember that assets include both tangible assets, like vehicles and buildings, and intangible assets, like intellectual property and brand names.
Typically, a business’ book value is an excellent business valuation method for determining a company’s fair value because it factors in its assets’ depreciation, amortization and debts. And because it relies on historical data, this figure is objective instead of subjective.
If you divide the shareholder’s equity by the total number of common stock outstanding, you will get the book value per share. You can then compare this value to stock value to determine if you are getting a good deal when buying a company’s shares.
Liquidation Value of a Company
A company’s liquidation value is what its business owners would get if they were to sell it hurriedly on the open market. According to ScienceDirect, while the value may consider the depreciation of assets, it does not factor in the value of intangible assets, such as goodwill, and is based on market prices.
The liquidation value of your business will always be lower than its fair market value. Also, if the business were to be sold quickly in an auction, an appraiser must account for an even lower price or higher discount rate. That’s because you will have even less time to sell a business in distress. It makes sense to consider the liquidation value of your business if it faces a possible bankruptcy situation or if you are a creditor looking to finance its operations.
If the market price of a business stock is less than the liquidation version, it indicates a lack of confidence among investors concerning the company’s future prospects. And in such a case, it would be best to sell the company and return the net money generated back to investors.
The total value formula in this case is:
Liquidation Value = Total Tangible Asset Value at Time of Liquidation - Total Value of Liabilities
Liquidation Value = Auction Value of Assets - Liabilities
Market Value of a Company
The market value, or market capitalization, of a company is its stock value within the open market. It depends on the number of outstanding shares and the share price. So, it doesn’t apply to any private company. You can find the information from a company’s website, stock market websites such as the Wall Street Journal and company balance sheets.
The market value of a company tells you what people are willing to pay to own it. And that sale price is subjective, based on investors’ perceptions of the business’ potential, instead of the historical data.
In this case, the stock market total value formula is:
Market Value = Current Stock Price * Company’s Outstanding Shares
Calculating the company’s market capitalization can help entrepreneurs know the earnings per share value, which is an indicator of profitability.
Enterprise Value of a Company
NetSuite explains that a company’s enterprise value is the total value of the business if you were to buy it. It considers the business’s market value, debts and preferred stock. And then, it subtracts its cash and cash equivalents from the total value equation.
You should consider the enterprise value of a company if you want to buy or take it over. That’s because the purchase price must be enough to pay everyone with a stake in it, including debtors and shareholders, before owning it and still maintaining future cash flow.
In this case, the total value formula would be:
Enterprise Value = (Market Value of Company + Total Debts) - (Cash+ Cash Equivalents)
It is important to learn the various value formulas or valuation processes for any company that interests you. Alternatively, you can use a business valuation calculator. That way, you can determine its profitability, whether it’s worth investing in and if you can acquire it.
Generally, the knowledge comes in handy whenever you want to determine how healthy a business is compared to similar businesses.
- Total company value should always be looked at in terms of what a company can do more profitably and what assets a company can best convert to cash.
I hold a BS in Computer Science and have been a freelance writer since 2011. When I am not writing, I enjoy reading, watching cooking and lifestyle shows, and fantasizing about world travels.