A business valuation is a process that calculates the value of an organization. It is vital for financial reporting as well as other purposes, such as dispersing shares and selling your business part of it, creating succession plans, or obtaining finance.

The value of a company can be determined by its assets, earnings, or market potential. The most common methods for valuing a company include the multiples of earnings or times-revenue method as well as the discounted cash flow method.

The times-revenue or earnings-multiples method multiply your business’s data room software earnings or revenue by an industry standard to determine a value. This is a good way to get an idea of what your business’s worth but it doesn’t necessarily paint a complete picture. A restaurant that earns $250k a year, and is valued at five times that amount, might be worth more if it has a solid brand name or high quality dining experience.

The formula for book value is another method that is used widely. This method adds up the total value of your assets, such as equipment, real estate and inventory, and subtracts liabilities that are outstanding loans and debts. This method is simple and easy, but it might not reflect the true worth of your business, particularly in the case of growth potential. Investors and buyers are often more focused on the potential for future profits than they are about your current assets. This is why it’s beneficial to conduct a complete valuation, for example by an appraiser for business or a broker, before seeking outside investment.