Hi Lykkers, Have you ever heard someone say, "This company is worth $5 million," and thought, How do they know that? Or maybe you've seen someone on a business show throw out numbers like they're pulling them out of thin air.

Truth is, there's a science behind it. It's called business valuation, and it plays a huge role in the world of startups, investments, sales, and corporate decisions.

Whether you're planning to start your own business, invest in one, or just curious, understanding the basics of valuation can be a game-changer. Let's walk through what business valuation is, how it works, and why it matters — without the fluff.

What Is Business Valuation?

Business valuation is the process of determining the economic value of a company. It answers the question: If I wanted to sell this business today, how much would it be worth?

This valuation is not only important for sales but also for attracting investors, applying for loans, settling disputes, or planning for taxes or estate transfers.

Why It's More Than Just Revenue

A common mistake is thinking that revenue equals value. For example, if a business makes $500,000 in sales per year, it doesn't mean the company is worth $500,000.

Why? Because what truly matters is profitability, growth potential, risk, industry trends, and market comparisons. A company that earns modest revenue but has high profit margins and growth potential can be worth more than one with massive sales and high costs.

"Price is what you pay. Value is what you get." — Warren Buffett.

Three Common Ways to Value a Business

There are several methods, but here are the three most widely used ones in real-world business:

1. Asset-Based Valuation

This method focuses on what the business owns and owes.

Formula:

Assets – Liabilities = Net Business Value

It works best for companies with significant physical assets, such as real estate or manufacturing businesses. However, it doesn't always reflect future earning potential.

2. Income Approach (Discounted Cash Flow)

This approach looks at the money the business is expected to make in the future and calculates its value today.

Why it matters:

It's based on projections — expected cash flow, adjusted for risk, inflation, and time.

Often used for tech startups or service businesses where future profits are key.

3. Market Approach

Just like real estate, this method compares your business to similar businesses that have recently sold.

If your competitor sold for five times their annual earnings, and you're in a similar position, that gives you a ballpark figure.

Understanding Valuation Multiples

Valuation often uses multiples. For example:

- 2x Revenue

- 4x EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

So if your business earns $200,000 in EBITDA, and companies like yours sell at 5x EBITDA, your estimated value might be $1 million. Keep in mind, multiples vary depending on industry, business model, and investor appetite.

Factors That Influence Valuation

Several elements impact a business's perceived value:

Industry Trends – Booming industries get higher valuations

Customer Base – Loyal customers increase value

Brand Reputation – Strong branding builds trust and worth

Financial Health – Clean books and healthy profit margins are essential

Scalability – Can the business grow easily without massive costs?

Owner Dependence – A business too reliant on its founder may lower its value

Final Thoughts

At its core, business valuation isn't just about numbers — it's about potential, performance, and perception. Whether you're trying to sell your company, attract investors, or just understand what makes a business valuable, learning these basics gives you a strong foundation.

Knowing your numbers can give you confidence — and knowing your worth can give you power.

So next time someone asks, "What's this business worth?" — you'll know it's more than a guess. It's a calculation backed by facts, strategy, and vision.

Stay smart, stay curious, and always know the value of what you're building.