How To Determine The Value Of A Small Business

Quite a lot of small businesses aren’t adequately valued. This is similar in many respects to operating your business blindly without knowing where your business needs improvement.

This article will be showing you how to determine the value of your small business.

More often than not, a lot of small business owners assume that valuation is mostly for the more established business but that isn’t true.

Valuation does a lot for a business as you’ll soon learn.

A wide range of valuation methods exists which include looking at earning multipliers, market cap or book value, etc.

Benefits of Small Business Valuation

Irrespective of the type of business you do, you tend to get a better handle on your operations.

This action takes a look at the different operational aspects of your business with a view of showing the true worth of the business.

First off, the valuation of your small business helps with charting the course for the future by way of operational improvements. With a valuation, you get a baseline.

In other words, you get to know what you’re doing right and where you could improve.

Another vital aspect of small business valuation is that it helps identify gaps using key performance indicators.

What more? it tends to help business owners with better management in addition to creating accountability as well as a benchmark as well as maintaining best practices standards.

With valuable, a clearer perspective on price is gained. This simple action also helps with getting increased access to financial inflow or capital.

More importantly, you get to measure your business’ progress.

How to Value A Small Business

To value your small business, the starting point is to consider the methods involved.

There are multiple areas to focus on such as the liquidation value, the book value, market capitalization, earnings multiplier, discounted cash flow method, as well as the time’s revenue method.

An understanding of these evaluation methods won’t be possible without providing some background information. Each method provides a unique way to value your small business.

So, you can either decide to value your business using a single method or you may choose to do so through the adoption of multiple methods.

  • Liquidation Value Method

This gives a sense of what’s involved here during valuation.

Here, the net cash your small business generates when its assets are sold and its liabilities paid off is what constitutes the liquidation value.

In other words, it takes a holistic view of what your business is worth if it’s to be in the market today.

  • The Book Value Method

What’s the book value about? It simply has to do with what’s in your balance sheet statement.

Within the balance, sheet statement is shareholders’ equity. Now, the value of such equity matters and is being considered with the sole aim of finding out how much value is left.

Of course, to do this, you’ll need to have the total liabilities subtracted from your business’ total assets. This leaves you with the book value.

  • Market Capitalization Method

To get the market capitalization value of your small business, its total outstanding shares need to be multiplied by the share price. This is the easiest form of business valuation as it isn’t as difficult as you think.

However easy it may seem, it’s best to have this done by a professional.

The professional gets to decide what valuation method is most suitable for your small business. The reason is simple, certain valuation methods work best for certain types of businesses.

So, getting some professional help goes a long way in helping to achieve the right kind of valuation.

  • Earnings Multiplier Method

When an earnings multiplier method is adopted, it gives a clearer idea of what the value of your small business is.

This is achieved by adjusting cash flow that may be invested at present interest rates with future profits. With the earnings multiplier, you get a clearer picture of your business’ valuation.

  • Discounted Cash Flow Method

Under the discounted cash flow method, a projection of future cash flow is made and the findings adjusted to achieve the current estimated value of the business.

This approach or method tends to be more realistic to a lot of businesses as it considers inflation.

  • Times Revenue Method

This valuation method is implemented based on the economic sector or industry you’re involved in.

The times’ revenue method utilizes a multiplier to which the stream of income or revenue generated over a period of time is multiplied by.

Steps For Small Business Valuation

When it comes to valuing your small business, you’ll need to consider several variables ranging from establishing your net income and looking at multiples.

Other steps include figuring out your market, estimating your potential market growth rate, and also adding growth projections.

  • Establishing your Net Income

Establishing your net income simply translates to subtracting all expenses from the gross profit. This gives a clear idea of what your net income is.

  • Figuring out your Market

Every small business has a market it serves. This includes yours. So, it’s necessary to have your market figured out due to its importance to the existence of a business.

Your market will impact profitability to a large extent. Are you in a stable market? If so, historical figures will prove useful in predicting the value of the business.

  • Estimating your Potential Market Growth Rate

Another way to find or determine the value of your small business is by comparing your growth rate against that of the market you’re a player in. Some persons may not be equipped or knowledgeable about this.

So, enlisting the help of a professional will be a great way to go.

  • Adding Growth Projections

For a market that isn’t new, the stability and the long history of the market allow for reliable projections to be made. Here, the use of historical data to calculate growth is necessary.

A yearly percentage increment helps determine the business’ value over a certain period or number of years.

These are creative ways to determine the value of a small business. We’ve also added the different valuation methods or processes used.

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