How accurate is your estimate of your company's value? This question can be deceptively challenging. You may be quantifying the success of your company based on tangible measures, such as annual revenue and profit, but your company has long-term potential and value beyond the dollars it generates. This perspective is important to incorporate into your valuation. The following measurements and metrics can help guide you.
Estimate Future Profits
It's important to develop an understanding of your small business's health and longevity. You may already be accustomed to annual or quarterly forecasts, but you must also counterbalance these projections with a long-term view by creating an estimate for what you expect to be earning years from now.
This process is as simple as calculating what you've earned recently and in years past, and then using that number to estimate how much you expect to earn in the future. Determine your average profits over the last five years, for example, and then multiply this metric by the number of years for which you'd like to measure your value in the future.
Develop both a conservative estimate and one that is more aggressive so that you can assess your full strategic picture. Take care to consider and avoid situations where you are understaffed, overstaffed, underspending or overspending.
Consider Your Customers
How often do your customers return to your business? This metric is important to track when assessing your business's long-term health. As you bring new products and services to the market, your existing customer base becomes more valuable. Calculate how much you've earned from your top customers over the last three to five years, in addition to how often they're returning.
Use these two metrics to understand how sticky your business will be in the future. If you know how much you expect to earn from your customers over the long term, you can better tailor your customer acquisition processes.
Determine if the Market Is Evolving
It's a good idea to figure out what demand exists now and how you expect that picture to change over time. To find this information, seek out public studies from market research companies. You can also look at demographic reports from the U.S. Census or local government sources. You'll also want to take a look at your competitive landscape and map out changes you expect to take place among key players in the market.
Knowing your company's value can be extremely beneficial for your long-term planning strategy. You'll have a strong sense of where you can afford to take risks and make investments and when you should be more conservative in your approach. You'll also have a better understanding of how to position your company in the event of a buy-sell situation. You never know what the future may hold, but an accurate forecast can help ensure you're taking the right steps forward.
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