Selling your small business is not as easy as slapping a “For Sale” sign on the door. You must undergo a number of steps to ensure that you are selling your company for its calculated worth. There are a number of methods that can be used to find business valuation. The value of your business can vary slightly depending on the method used. If you in the beginning stages of selling your business, follow these simple steps on how to value a small business.
Business Valuation: Step-by-Step
1. Preparing for Valuation
Before starting the business valuation process, you want to take the time to gather the proper materials and plan accordingly. During this step, it is important to pay attention to the details. Start by thinking about why you need to undergo business valuation. While the business valuation process is not a necessity, it can provide you with invaluable insight to ensure that you get a fair price for your business and that it sells relatively fast. Once you know why you want to perform business valuation, you can move on to collecting all crucial information.
2. Collecting Business Information
To get an accurate figure when determining business valuation, you will need to gather a wide range of historical financial statements. You want to add or subtract income and expenses to determine how profitable your business really is. The primary information you will need to determine this are your income statements and balance sheets. Ideally, you want to have at least three to five years of historic income statements, as well as several years of balance sheets. This will provide you with a more accurate look at how your business has performed over an extended period of time.
3. Choosing a Business Valuation Method
Once you have gathered the necessary information, you can use this information to undergo a business valuation procedure. There are three main business valuation methods, including asset approach, market approach, and income approach. The method that you choose will depend on a variety of factors, such as the value and complexity of your business’s assets, your business earnings history, your amount of access to comparative business sale data from recent market trends, and your ability to determine reliable business earnings projections for the future. You will also need to know your business’s debt and equity.
- Asset Approach: The asset-based business valuation method looks at your company’s assets and liabilities. With this method, you can calculate the value of your business by determining the difference between your assets and liabilities. When using this method, you will need to look at your business from a third-party perceptive. Consider what components may add value to your small business. These are known as assets. Then consider what components do not add value, such as debts that your company owes to creditors. To determine the value of your business, you can subtract your liabilities from your assets.
- Market Approach: The market approach for business valuation compares your business to other similar small businesses that have already sold. This means that the value of your business is heavily based on the current market. Start by looking at comparable sale prices from other businesses in your industry. With the market approach method, you will want to value your business at a similar amount to small businesses like yours. Typically, the amount that you come up with will be close to the fair market value. This means that your business is worth only what a buyer is willing to pay for it.
- Income Approach: The final business valuation method is known as the income approach. This method looks back at your small business’s history. By using your books and other financial documentation, you can prove to buyers that your business is not only profitable but also low risk. There are several things you will want to look at when using the income approach method, such as your past profits and your cash flow. You can also project future profits and possible debts by looking at your profit and loss statements. Together, this information can help you determine your small business valuation.
4. Following Your Small Business Valuation
It is important to remember that your small business may not actually be worth the value that you put on it. While it is your decision whether or not to use the results from the business valuation methods selected, you will need to remain realistic regarding how much you can actually earn from selling your small business. At the end of the day, your business is only worth what the current market says it is worth. While your business valuation results are just a guide, you may need to accept that the market will play a big role in your sale price.
Benefits of Using Business Valuation
Business valuation methods can be highly useful and provide a business owner with numerous facts and figures that relate to the value or worth of your company. This is often based on asset values, market competition, and income values. There are a variety of key benefits that come from using these business valuation methods, such as an increased knowledge of company assets, a better understanding of company resale value, and the ability to acquire a true company value. Business valuation can also be useful in the future during mergers and acquisitions, and when trying to seek investors.
Learn More About How to Value a Small Business
Learning how to value a small business is not always easy, but the effort is often worth the results. Once your small business has successfully undergone a business valuation, you are able to set new goals to boost your company’s value over the upcoming months or years. When you are finally ready to sell your business, you are often in a better position that will allow you to get maximum compensation from the sale. For more information about business valuation or for assistance with valuing your business, contact the business professionals at BBG Broker.