Interested in calculating your small business valuation? It’s simpler than you think as long as you keep the following principle in mind.
The valuation of your company is the amount a buyer will actually pay for it in the marketplace, not how much you personally feel or believe the company is worth or has the potential to be worth.
As long as you keep this principle in mind throughout the process, you’ll arrive at a number that doesn’t run buyers off and gives a genuine small business valuation.
The Beginner’s Guide to Small Business Valuation
When calculating small business valuation numbers, you have to start with an accepted methodology and the right documentation.
Small business valuation methodologies
There are a couple different small business valuation methodologies for you to consider. One is based on your business’s tangible and intangible assets. The other is based on a multiple of your business’s earning potential.
a) Asset-based valuation
An asset-based small business valuation uses the total value of the company’s tangible and intangible assets. It’s the most straightforward and simple method of valuation, but it’s also the most risky for the owner. Asset-based valuations can over-simplify the valuation and neglect to compute the earning potential of the company, potentially making your business look less attractive to potential buyers. Defunct companies and liquidations commonly use asset-based valuation.
b) Earnings multiplier method
The earnings multiplier valuation method may be the best way to value your small business if it’s thriving. Instead of basing your selling price on your tangible and intangible assets, you’ll base your price on a multiple of your business’s earning potential. This gives potential buyers the chance to estimate their ROI from the purchase, increasing the likelihood that you’ll sell your company quickly for a fair price.
Do you need an appraiser or broker to sell?
While you’re free to move forward without enlisting the help of a business appraiser or broker, chances are, you’ll decide to seek one out further into the process of selling. The help of an experienced professional can move your sale along quickly and ensure that your business is priced to sell in today’s market. Look for an appraiser or broker with extensive experience not only in their job, but in your industry as well.
Increasing your small business valuation
Two things are proven to increase the value of a small business: Past and current profits and future earnings potential. You can increase your small business’s value by doing the following things.
1. Document your profit track record
If you carefully document and track your record of profits and positive cash flow, you increase the value of your company. Using the earnings multiplier valuation method helps you increase your small business value.
2. Identify future advantages in your marketplace
Another tactic to increase the value of your business is to identify advantages your business could have in its marketplace in the future. Showing potential buyers the future prospects of your company can help them agree to a higher purchase price.
3. Include the possibility of seller financing
Seller financing can improve the value by making potential buyers willing to pay more for your company. In some markets, financing part of the sale is a great way to increase your sale price.