Business Valuation: Four Steps to Reach the Business Value Conclusion

Entrepreneurship is on the rise. It seems like every day, more and more people are coming up with unique ideas for their own business. Often time, the goal is to start up, and eventually sell to a bigger company in order to make a quick buck. However, some people do genuinely have an original, unique and great idea that has not been done before.

Growing Markets in 2022/23

However, it is important to note, that not every original idea is also a good idea. An aspiring entrepreneur must be in touch with what the market wants. Because, at the end of the day, no matter how unique your idea is, if nobody is interested in it, nobody will care about its originality. What we say may sound harsh, but it is the unfortunate reality.

So, before you come up with the next billion-dollar idea, look at the growing markets in 2022 and 2023. One of the fastest-growing industries today is the online gambling industry (or iGaming). Since the 90s, gambling online has evolved. Video poker sites have largely been replaced with poker, slots, blackjack, and roulette games.

One of the latest developments in iGaming is the live casino, which could truly be called an innovative and original idea. Another excellent idea, which helped the gambling industry develop and evolve, is the concept that online casinos can accept numerous deposit methods. We’ve come a long way from credit card-based payments. Nowadays, gamblers can play at crypto casinos, e-wallet casinos, or even Apple Pay online casino, which are growing in popularity.

So, as you can see, quite a few original ideas have made online gambling a lot more accessible today. But, iGaming isn’t the only rising industry. E-commerce, tourism, online betting, and online gaming are all growing industry, ripe for innovation.

However, before you start a business, you must be aware of a little concept called business valuation. So, just what is business valuation? Well, we’ve come up with 4 simple steps that you have to take in order to reach your business value conclusion.

Step 1: What is Business Valuation?

A person examining documents

The idea behind the concept is really simple. Business valuation, as the name suggests, is the process through which one decides how much a business is worth to the owner. In order to evaluate how valuable a business is, you must go through a few steps. While you might think that these steps are complex, in reality anyone can understand them with just a bit of effort.

Before you start your business valuation, you need to do a couple of things. First of all, ask yourself why you are evaluating a business. Are you interested in purchasing it? Are you just curious? Do you want to start your own business? Any of these reasons, and more, could lead one down the path of business valuation.

Once you’ve answered the question, you must also gather any and all necessary information that will help you evaluate the business. And even when all of this is said and done, you will still need to know the difference between standard (SoV) and premise of value (PoV).

Step 2: SoV vs. PoV

Before you can come up with a proper business valuation, you must know the difference between standard of value and premise of value. Why? Because, depending on what you are doing, you might come to a different conclusion regarding the valuation of a business.

Many of you might be confused by this. After all, shouldn’t a business valuation be an objective measure. And, while the answer to that question is yes, it also comes with a caveat. The outcome of your business valuation will depend on two things: how you measure the value, and what are the circumstances of measuring the value.

Standard of Value (SoV)

The standard of value is reflected in the way you measure the value. Luckily it is easy to come up with the standard of value. Because, more often than not, the standard of value is simply the fair market price of the business. For example, let’s say you have a $300,000-dollar business. If you are looking to sell, you will find that the standard of value is $300,000 dollars. However, does that mean that you will sell your business for $300,000? Not necessarily. This is where the premise of value comes in.

Premise of Value (PoV)

The premise of value refers to the assumption you come up with when setting up your business. For example, let’s say your $300,000-dollar business is not doing too great. You want to sell it in an attempt to salvage whatever you can. In other words, you are coming at it with the assumption that business isn’t doing great, and probably won’t improve. So, you are likely going to sell it for less than $300,000. Of course, the opposite is true as well. Your business could be booming, in which case you will be selling to the highest bidder.

Step 3: Gather the Business Data

So, everything we’ve talked about so far, relies on you knowing the business’ data. Meaning that step 3 is obvious. Gather as much of the business data as you can, and learn everything there is to know about the business you are evaluating. You will have an easier time of it, if it is your own business. However, even if it is a business you are interested in buying, there should be quite a lot of public data to pour through regarding said business. The necessary data includes:

  • The business’ earning history
  • The business’ assets
  • The business’ market value

Step 4: Beware of FOMO

Last but not least, we would like to warn you about a phenomenon known as FOMO (or the fear of missing out). FOMO is what happens when we see others participating in an activity that we want to engage in. This fear often leads us to make bad choices, that we can’t stand by. Whether it be making a bad investment, purchasing a bad product, or even something as simple as going out when we have work in the morning. So, come up with some ways to keep your fear of missing out in check, and make a well-informed decision before buying/selling your business.