How a company is valued: assets, cash flows, debts
"How much is my company worth?" is the first question most owners ask. The honest answer: there is no single number. Value depends on what the buyer is buying and what risk the buyer takes on. Here we explain the general logic, without specific figures or formulas.
Three main points of view
Assets. The question is what the company owns: cash, equipment, inventory, real estate, rights, trademarks. It also matters how much these assets are really worth, not only how much they are recorded at in the books. Old equipment or hard-to-sell inventory may be worth less than it appears.
Cash flows. For a buyer, what often matters most is how much money the company is able to earn and whether this will repeat in the future. Stable contracts, regular customers and clear sources of income are usually a stronger argument than a single good year.
Debts and obligations. Loans, tax and supplier debts, guarantees and possible disputes reduce what the buyer is prepared to pay. That is why it is important to know them and to talk about them openly.
Why the seller and the buyer see it differently
The owner knows how much work has been put in, and this naturally shows in the owner's expectations. The buyer assesses risk: does the business rest on one person, is it independent of the owner, are there hidden obligations. For this reason first opinions often differ, and negotiation is a way to reconcile them.
What can raise or lower the value
- Orderly documents and clear accounting increase the buyer's confidence.
- Dependence on one customer or one employee increases risk.
- Unresolved disputes and unclear obligations raise questions.
- A clear team and processes that work without the owner help.
What to avoid
Do not rely on the "my neighbour sold for this much" principle. Every company is different, and the neighbour's deal may have included completely different terms. Also, do not consider value to be only the assets in the books: value is what the buyer is prepared to pay for the whole package with its risks.
Practical advice
Before negotiations, write down your own vision: what you are selling, what you are keeping, which terms matter to you, apart from the price. That way you will not be forced to make decisions in a hurry during negotiations.
This overview is general: valuing a specific company requires a review of documents, and it is worth consulting a lawyer about the terms of the transaction.
This text is general information, not legal advice.