How to Do a Small Business Valuation
Whether you are buying or selling a small business, it will behoove you to understand the various methods of business valuation. If you are a small business seller who finds yourself ready to sell your business for one reason or another, then you will be particularly interested in learning more about this crucial process. And if you’ve landed on this page, then you probably want to know how to do a small business valuation.
Depending on your specific situation, you may be asking why it’s important to do a small business valuation if you are not interested in buying or selling, or at least not at that point. No matter where you are in your company’s life cycle, it is very beneficial to have all the information you need at your disposal if your plans change or you simply want to leave all options on the table.
Small business valuations can also aid you in applying for loans and securing other forms of financing. Another very important way that business valuation will serve you and your business has to do with fundraising. If your company is raising funds from investors, it will serve you well to have precise information about the worth of your business at the ready. After all, savvy investors don’t just give their money without care. They want to know exactly where their money is going and a business valuation tells them how your business is doing.
A valuation is a fully comprehensive picture of your company’s total worth. It’s a calculation that adheres to a very specific formula. The formula takes into account your assets, earnings, industry standards, and any debts or losses your company has suffered and overcome. Methods of business valuation are important for both sellers and buyers. Any business person looking to buy a company will want to be well versed in the ins and outs of how to do a business valuation, less they rely solely on the current business owner to understand the value of the business.
There are a number of tools and resources available to help a small business navigate the methods of business valuation. As we mentioned earlier, these tools will not just be useful for the business owner who is ready to sell, they also serve businesses in planning their futures and understanding their financial health. Lastly, they are also really important for those entrepreneurs who are interested in acquiring a small business for their own portfolios.
Now that we all understand the whys, let’s dive into the hows. Here are some great tips on how to do a small business valuation.
Understand Your Goals
What is your objective for the business valuation process? Do you wish to sell or buy? Do you want to further your succession or retirement planning? Do you want to make better, more strategic decisions in terms of finances or marketing? Clarifying your intentions as you enter into a valuation is crucial – it not only helps you determine which method is best, but it empowers you to use the insights gleaned to meet your goals.
Get to Know the Different Methods of Business Valuation
As mentioned, there are different methods of business valuation. The one that works best for you depends on a variety of factors, including your goals, your industry/sector, your company’s assets, progress towards the business plan, etc. The most common are:
- Cost Approach
- Market Approach
- Income Approach
Know Which Method Works Best for You
If you have a very small company with significant tangible assets, the cost approach may be the most straightforward, relevant way to value your business. If, on the other hand, your value lies more in intangibles (e.g. intellectual property, company culture, goodwill) and in projected cash flows, then an income approach may more accurately capture value. It depends.
Work with an Experienced Professional
How to do a small business valuation? Entrust the process to an experienced professional. You have a job to do: running your business and making solid decisions for the future. Let AMB Performance Group guide you through valuation so you can put this information to work for you.
Contact AMB Professional Group to learn more.