What Is My Small Business Worth?
Many business owners today suggest their top goal is to eventually sell the company so they can fund their retirement. Unfortunately, analysts suggest most business owners won’t be able to sell their companies when they’re ready for one key reason – they’re not taking the necessary steps now to make that transition a simple one. One key step? Valuing a small business early so you can show the growth you hope to when it’s time to sell. Every owner at one point or another starts to wonder, what is my small business worth? In this article, we look into how to find out.
What Is My Small Business Worth?
It’s a fairly simple question, but the reality is that most owners aren’t actually ready to answer the question. It can be a difficult number to determine, but understanding the process of valuation can help you take the steps you need to so you’re better prepared to eventually sell your business, add a partner, or even access the capital you need. There are several good ways to complete a proper valuation of your company.
- Assets-Based: In this scenario, you’d add up the value of everything your company owns. Don’t overlook the equipment your business currently owns and any inventory you have in stock. Then total your debts or any liabilities your company has. Subtract the cost of those from the assets, and you have a base valuation.
- Revenue-Based: Should you choose to look at your business’s overall value this way, you’ll be examining how much your company generates each year in sales. Then you decide how much a typical business in your industry is worth as you hit those sales numbers. For example, typical companies in your industry might be worth two times their annual sale value. Once you know that number, plug it in and determine how much your company is worth.
- Earnings Multiples: Many companies base their valuation on a multiple of the company’s earnings. This is sometimes considered to be the price-to-earnings number. The goal here is to estimate the overall earnings of your company for the next few years. Then come up with the price per share. You’ll divide the two of those numbers.
- Discounted Cash Flow: Completing this kind of valuation can be a bit complex. Here you look at annual cash flow and project that well into the future. Then you discount the value of that future cash flow using a Net Present Value calculator to come up with a total.
- Market Comparison: The final way to take a closer look at what your business might be worth is to compare it to others in your industry that have the same general earnings yours does. That will help you understand what it might be worth. If, for example, you run a small computer repair shop, you might look at other computer repair shops in a 50 mile radius that are about the same size as yours. What have those companies recently sold for? Those numbers will help you understand what yours might be worth.
Which Method Is Right For You?
So, how do you know which method might give you the true worth of your small business? The simple truth is that you probably don’t. Working with a professional to help determine the overall worth of your business is probably the best idea.
Wondering why? Whether you’re trying to set some goals for your company or you really just want to understand what you might be looking at when you’re finally ready to sell, finding the answer to what is my small business worth can be incredibly helpful. It could help you market your company right now, or it could be used to show how much your company has grown over the years.
At AMB, we work with businesses every day to help develop ideas, tackle challenges, and define the next steps. That can mean a solid knowledge of your business and the motivation you need to move forward. If you’re ready to learn what your business is truly worth and how you can strengthen your company, schedule an intro call with us today.