4 Small Business Valuation Methods

Knowing the true value of your business is important whether you are selling or just trying to determine the financial standing of your company. You may not be sure how to value your business, but there are common ways, and some are easier than others. Continue reading this article to learn more about four small business valuation methods.

What is a Small Business Valuation?

Small business valuations give you the value of your business either through asset, market or income methods.

The asset methods are often used for businesses that are going out of business and need to liquidate. Income methods are for businesses that expect growth or at least to continue with stability. Market methods may be one of the simplest ways to value your business, but if the market isn’t doing well, you might not get a great price.

1. Fair Market

Fair market value takes information from the market for businesses that are similar to your business and have recently sold. Fair market value does give you an idea of how much businesses have sold for but shouldn’t be the only means of valuing your business.

Each business is different and having an average of what has sold recently means some businesses have sold for higher and lower prices. Fair market value is a good place to start to have an idea of what the market can handle right now but don’t underestimate your business.

While a business that is just like yours might sell for a certain price, if your business has a better structure and better leadership, it could fetch a higher price. Many factors can cause your business to go for a higher or a lower price so make sure your business is as attractive as possible. Never settle for fair market value if your business is a well above average business.

2. Multiples of Earnings

Multiples of earnings method is also known as the revenue method. The multiples of earnings method calculates the maximum worth of a business by assigning a multiplier to your business’ current value. Depending on the industry your business is in, the economic climate and other factors, the multiplier will be different.

Your goal should be to get potential buyers and investors to see why a higher multiple makes sense for your business if you want to get the highest valuation.

3. Asset-based

Here is the asset-based approach we spoke about earlier. The asset-based approach takes all of your business’ assets including stocks, equipment, real estate and anything else value and subtracts all liabilities. You can easily get these numbers from your balance sheet.

There are two ways to go about an asset-based valuation. One of those ways is going concern, and the other is liquidation value.

Going concern is for a business that doesn’t plan on liquidating. Going concern gives you the business’ current total equity.

The liquidation value is for businesses that are finished and want to get the most out of their assets with a quick sale. Liquidation value is almost always much less than fair market value, so if you have the opportunity to sell your business while it is profitable, this might be a good option for you.

4. ROI-based

When an investor wants to put money into a business, one of the first things they consider is the ROI. Depending on what the market is, a good ROI may be higher or lower. For instance, if you were to offer an investor 25% of your business for $250,000, then you’d be valuing your business at $1 million.

Even if you think your business is worth a certain amount of money, you have to convince the investor or lender that your valuation is correct. You can’t simply say your business is worth a certain amount of money without having facts to back it up.

Getting the Most Out Of Your Business Valuation

Before you have your business valuation, make sure your house is in order. All of your financials should be easy to understand. You should have all of your processes in order and on systems, so it is easy for anyone looking to buy to take over.

Your business value can go up and down, so it is important to stay on top of what is happening. You should stay on top of what is happening not only in your business but what is happening in the market. If you can sell your business when everyone wants to buy, you are likely to get a higher price for the same business simply because what the market is doing.

Keep in-depth records so potential buyers can see exactly what has taken place and is taking place. When you have these records that can easily be reviewed, it is easier for your potential buyer to see a bright future with your business. Buyers use this information to project potential risks and see if the investment is going to be a wise move on their part.

Deciding Your Valuation Method

Now that you have an understanding of valuation methods, you can determine the way you need to go about valuing your business. If you aren’t sure, you can speak to a professional that will help you through the process. Knowing the value of your business is an important part of being a business owner so take the time to value your business today.

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