How do I Value my Small Business?
Valuing your small business is a difficult and complex task. There are a number of approaches you can use to conduct a value analysis on the company, which will in turn help you determine what buyers may offer. To spare you some time with this process, we’ve prepared this blog post explaining our favorites and how they can help. Don’t worry; it won't take long!
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| What is the Value of Your Small Business?
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| A small business valuation is an assessment of what your company is worth by analyzing various factors such as sales figures and assets.
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| In order to calculate the value of your business, you need to know what the market price is for your product or service and how this compares to what you can sell your product or service for.
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| You also need to compare this with the values of similar companies and then adjust these figures based on estimates for growth in sales, depreciation and future profitability.
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Above: Quick Valuation Checklist. Please note that the valuation of your company is an ongoing process and it is not a one-off exercise. Moreover, the valuation of a business varies from industry to industry. Therefore, it would be best if you had an expert assist you in this process to ensure that your assessment has the most accurate data for each factor involved.
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| How do I value my small business?
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| One method for valuing a small business is to hold a traditional auction where you can sell off all of your assets using sealed bids and make use of pre-set prices. Another option may be to place an estimate on your current assets and use this estimate to determine the sale price of your business.
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| Appraisals are another way for you to determine how much your business is worth. In this case, you are able to submit the different factors involved in making up the value of the company, such as sales, cash flow and its liabilities. These values will be compared with market prices and other local businesses in similar industries to make sure that a fair price can be set.
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| Another approach you can use is by using different methods, including comparable companies and established methodologies. Ultimately, the best value for your small business is not a definitive and static figure but instead an estimate of its worth.
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| How can I value my small business?
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| There are a number of factors that you must consider when you want to know how much your company is worth. These factors include: Sales figures . A valuation needs to take your sales into account. The more cash flow the better. If your figures have been strong and stable over the past years, you can expect to get a better price during the sale or in your negotiations with potential buyers.
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| Profits . Your profits are also very important. You can receive a higher valuation if you have been able to create a net profit in the previous years. The more successful you were in the past, the better price you will be able to negotiate.
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| Cash flow . When valuing your small business, cash flow is of great importance as well. The more cash flow your business generates and the better the cash flow is over time, the easier it is for potential buyers to gauge how your business will perform in future. |-
| Assets . Assets are essentially what makes up your company and consists of real property, machinery and equipment, patents and trademarks and many other factors such as licenses and copyrights. The higher the value of your assets, the more potential buyers will be willing to pay for a business with these unique assets.
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| Liabilities . Your company’s liabilities are debts or payables. This includes mortgage loans, outstanding accounts payable and other financial obligations that your small business may have. The less liabilities you have, the more you will be able to sell your business for. |-
| Debt . Debt is another important factor when considering how much your small business may be worth. The less debt that you have, the higher value you can expect for your company during negotiations or an auction sale of the business. |-
| Competition . The competition of your small business should also be taken into account. The more profitable your business is compared to others in your industry, the better price you will be able to command during negotiations or an auction sale. |-
| Future prospects . The future prospects of your small business should also play into determining its value. If you have been able to predict a strong and stable growth in sales, profits and cash flow over the past few years, then you can expect to receive a higher price for your company when you are going through negotiations or an auction sale. |}
Above: The Top 7 Tips for Valuing Your Small Business.
The Bottom Line
Valuing your small business is a difficult and complex task. There are a number of approaches you can use to conduct a value analysis on the company, which will in turn help you determine what buyers may offer. To spare you some time with this process, we’ve prepared this blog post explaining our favorites and how they can help. Don’t worry; it won't take long!
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Conclusion
The purpose of this post was to provide some tips on how you can make sure that you’re getting the best value for your business. The more information you have on how different elements of the company are valued, the better your chances will be to get a high price for it during negotiations or an auction sale. Now that we’ve discussed the important aspects of valuing your small business, why not check out our ultimate guide for selling a small business! We’re sure it will help you in your decisions moving forward as well.