How To Valuate A Small Business

how to valuate a small business

At some point when running your small business, you may need to valuate your organization. If you are looking to sell the business, compensate your partners, or run other important calculations, you need to know what your business is worth. 

How do you do value a small business accurately? 

Keys To Success With Business Valuation

If you want to be successful in valuating your small business, these are the most important keys to success: 

·       Choose The Right Partner 

It is possible to calculate a value for your business entirely on your own, but you'll likely be more successful if you work with a business valuation partner. An organization with more experience and access to true experts can make sure that you're looking at the right variables and that your valuation is seen as objective and fair. With the right partner on your side, you won't have to worry about accuracy or thoroughness. 

·       Get Organized 

Spend some time getting organized. If you want to create the most accurate valuation, you'll need to look at countless variables associated with your business, including your income, assets, liabilities, licenses, permits, and more. It's going to be a much smoother and more efficient process if you have access to all the paperwork you need. 

·       Don’t Overlook The Details 

It is easy to speculate about the value of your business when looking at the big picture, but if you want your valuation to be impactful and accurate, you need to look into the details. Your calculations need to be based on real, measurable numbers. 

·       Understand The Terminology

Take the time to learn the most important terminology in business valuation. You don't have to be a financial expert, but you should be able to carry on a conversation with the financial experts. Otherwise, you might end up lost in a sea of acronyms and unfamiliar terms. For example, EBITDA stands for “earnings before interest, taxes, depreciation and amortization,” and SDE stands for “seller’s discretionary earnings”. You will need this context to fully understand what people are telling you. 

What To Take Into Account 

When calculating the value of your business, these are some of the most important variables to take into account: 

·       Assets 

Look at all of your business’s assets, including both tangible and intangible assets. You'll want to consider your real estate, any equipment you have, copyrights and intellectual property you hold, and any standing inventory you have. Be sure to factor in depreciation when relevant. 

·       Earnings Or Losses

Present numbers on your earnings or losses. How much revenue did you generate and what were your expenses over the last few years? Is this business consistently profitable or is it consistently taking losses? How is it projected to perform in the future? 

·       Debts And Liabilities 

In addition to assets, you should be looking at your debts and liabilities. How much debt do you currently hold? What are your loan payments like? How do these modify the net value of your business? 

·       Your Business Model 

What type of business is this and how is it set to grow in the future? How will revenue and/or profitability improve? 

·       The Industry 

How are businesses like yours performing? Is this industry set to grow, shrink, or stagnate in the future? 

Primary Approaches To Small Business Valuation 

When you're ready to start actively calculating your business value, these are the most approachable methods you can use: 

·    The Income Approach 

With the income approach, you’ll be calculating a value for your business based on how it expects to generate income in the future. For example, in the discounted cash flow method, you’ll forecast your business’s future cash flow, then adjust that value based on the risk associated with purchasing the business. In the capitalization of earnings approach, you’ll demonstrate future cash flow potential based on current knowledge on current cash flow and return on investment (ROI). 

·    The Asset Approach 

It is also common for businesses to be valued based on the assets they currently hold. In this method, you’ll take inventory of all your assets, quantify their value, then subtract any standing debts and liabilities you have. You can then make adjustments based on other variables. 

·    The Market Approach 

You may also want to valuate your business by using the market approach; in other words, you’ll estimate the value of your business by determining what other buyers have paid for similar businesses in similar situations. Are there any close competitors of yours that have been sold recently? How much were buyers willing to pay for them? 

The Bottom Line On Business Valuations

Valuating a small business can be a long and complicated process, even if it doesn't feel like your business has much substance to measure. Still, at the end of this process, you'll have an objectively defined value of a company that you can use to close your next deal.

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