Many small business owners from time to time and for various reasons may ask themselves, “How much is my business worth?” The answer is not found in palm reading nor in some dartboard activity. Rather, it is found in a methodical small business valuation, which is simply the process of calculating the economic value of a business.
What Are the Reasons to Do a Small Business Valuation?
A small business valuation may be undertaken to obtain a bank loan, better assess a business’s growth potential, prepare to attract investors, sell stock, or prepare to sell a business to the right buyer for the right price. It can also include establishing the business value for insurance purposes. Plus, a confident business valuation can lead to better decisions about hiring staff and otherwise planning for growth.
Four Common Small Business Valuation Methods
The value of a company is much more than a measure of the dreams, time, and sweat equity poured into a company. The four common small business valuation methods involve assessing:
- Assets. This method requires calculating the book value of all assets that could be converted into cash including inventory, equipment, real estate, and securities, and deducting from those your liabilities. It can also include some intangibles like trademarks and copyrights. This provides a straightforward business valuation, but it does not consider all the important intangibles of your brand image, reputation, and loyal customer base.
- Revenue/Earnings. This uses the business’s revenue (gross income) or its earnings (net profit after expenses) and applies an industry-standard multiplier to establish a value. An alternate approach makes a projection about future earnings and applies an industry-standard multiplier to calculate value. This also provides a straightforward business valuation but lacks some precision because of future economic fluctuations and unknown competitive activities.
- Discounted Cash Flow. This method estimates the future cash flow of a business based on its historical cash flow and then discounts the projection into current dollars. It also considers the level of risk posed in each business and industry. The downside of this method is that the projections may be complex and thus may be off or unrealistic.
- Market Value. This method compares businesses in the same market with similar customers and similar revenues to yours. This method may not consider all the important variables of a business’s value.
To get the best measure of a business’s value, it is wise to use several methods.
What Does it Take to Do a Small Business Valuation?
To achieve a small business valuation, first, get your financial documents in order. That includes profit and loss statements for three years, tax filings and returns, and any licenses, deeds, and loans. Second, accurately assess and list all tangible and intangible assets. Fourth, provide a solid business plan along with a description of your business model. Fifth, carefully research your industry to establish competitive matches.
If You Are Selling Your Business, Here’s How to Get the Best Valuation
Get the best small business valuation by:
- Valuing it with EBITDA.
- Using all possible intangibles.
- Recording and categorizing all assets because some assets will be more attractive to buyers than others.
- Sell to a competitor who will recognize the advantage of reducing local competition.
Get Expert Accounting and Financial Assistance
Contact Doerhoff & Associates, CPA, based in Jefferson City, MO for professional accounting and financial assistance that you can count on. Doerhoff & Associates has one goal in mind, to provide comprehensive business accounting services designed specifically for your success.
