Ways to Valuate Small Businesses
We've had clients ask us for guidance in determining the value of a business whether it be for purchase, merger, sale, or something in between. There isn't a one-size-fits-all formula. Businesses vary in size, scope and nature - all of which play a role in a valuation.
At a high level, there many types of valuation methods for small businesses. Some are quite simple, some more complex. In the list below, we provide a few of the more common methods. But note our list is not exhaustive - there are many models available.
To find out which might be right for you, we recommend reaching out for professional assistance from us (in certain circumstances), a CPA, appraiser or other professional.
1. Asset Valuation
Use the book or market value of your company's tangible and intangible assets to determine your business’s worth. Count all the cash, equipment, inventory, real estate, stocks, options, patents, trademarks, and customer relationships as you calculate the asset valuation for your business.
2. Historical Earnings Valuation
A business’s gross income, ability to repay debt, and capitalization of cash flow or earnings determines its current value. If your business struggles to bring in enough income to pay bills, its value drops. Conversely, repaying debt quickly and maintaining a positive cash flow improves your business’s value. Use all of these factors as you determine your business’s historical earnings valuation.
3. Relative or Market-Based Valuation
Using this method, similar businesses that have been recently sold are examined to determine the value of your business. It compares the value of your business’s assets to the value of similar assets and gives you a reasonable asking price.
4. Future Maintainable Earnings Valuation
The profitability of your business in the future determines its value today, and you can use the future maintainable earnings valuation method for business valuation when profits are expected to remain stable. To calculate your business’s future maintainable earnings valuation, evaluate its sales, expenses, profits, and gross profits from the past three years. These figures help you predict the future and give your business a value today.
5. Discount Cash Flow Valuation
If profits are not expected to remain stable in the future, use the discount cash flow valuation method. It takes your business’s future net cash flows and discounts them to present day values. With those figures, you know the discounted cash flow valuation of your business and how much money your business assets are expected to make in the future.
This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. (C) Twenty Over Ten.
