Whether or not you plan to sell your business, you still need to know its value. Knowing the worth of your business and calculating the value is easy. Today we will cover the basics of small business valuation, the methods and how to use them to find out how much your business is worth.
What Is Business Valuation?
Business valuation is the process to determine the economic value of a company. It lets business owners put a price on their busines if they are planning to sell it. Investors and lenders also want to know the market value of a business before putting their money on the line.
The following information is needed for business valuation:
- Financial statements for at least the last three years
- Copies of business tax filings and returns
- Licenses, patents, and other proprietary documents
- An updated balance sheet for the business
- Short overview of your personal or business finances
The more information you have, the more accurate your calculations will be, so it is important to make sure you have your business documents in a safe place.
Methods for Small Business Valuation
When considering how to value your company, there are 3 main categories which are asset-based, market-based, and income-based. We will break down these methods down below.
Asset-Based Valuation Method
This technique takes the sum of the assets your business owns and placing a market value on them. The following is counted as an asset:
- Real estate
- Company vehicles
- Websites, social media
You need to make a list of all your assets and assign them a monetary value. Add the value up and subtract its liabilities to get the starting value. This method is useful if you are valuing a company that does not have many earnings or is losing money.
Market-Based Valuation Method
The market-based technique involves comparing your business with other businesses that are the same size as yours and in the same industry that have sold for a disclosed amount. This approach will help you determine what the appropriate selling or purchase price is based on your market. This technique works great for businesses that are rapidly growing.
Income-Based Valuation Method
This method determines the amount of income a business can expect to generate in the future. This approach consists of two methods which are the discounted cash flow method and the capitalization of earnings method.
The discounted cash flow method determines the present value of a business’s future cash flow. This works best for businesses that are new with high-growth potential but are not profitable yet.
The capitalization of earnings method calculates a business’s future profitability using the cash flow, ROI, and expected value of the business. Business that are already established with stable profitability use this valuation method.
How to Improve Your Small Business Valuation
The valuation of your business is going to depend on how much money it makes and increasing revenue and cutting costs will help improve your valuation. One step you can take is to hire a professional appraiser. They will be able to give you the valuation of your business and help you identify the strengths and weaknesses. You can also highlight how your business has low turnover because you have happy employees.
You can also review and improve your promotion strategy. Before you try to sell your company, you need to control the public’s perception of it. A business that has loyal customers will sell for more than a business that does not. Improve your market positioning and awareness by reviewing and improving your promotion strategy.
Knowing how to estimate the value of your small business is important for many reasons, even if you are not planning on selling your business. Performing a valuation of your business can help you track its progress and growth over time.