How to value a small business

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Being able to value your business is a crucial success hack for any entrepreneur, whether you are looking to sell the business or seek further funding to scale up your small business. Knowing the value of your business will go a long way in deciding how much to sell it. It would also give you a lot of confidence when pitching to potential investors and financiers whose language is all about numbers. Valuation helps you assess the financial health of your business and make a more informed decision when choosing between selling and growing it.

You can use the below methods to value your small business:

Asset-Based Valuation

Sum up all tangible assets your business owns less the liabilities. Assign a monetary value to all your asset. Take that motor vehicle, cash at hand/bank balance, equipment, office premise, or furniture and estimate how much they would be worth in the market today. Sum your liabilities like overdrafts, debts, or bank loans and deduct these from your assets to get your business’ net value. Coming up with the business’ balance sheet helps you know how much money you would have at hand if you were to sell all your assets and pay off all your debts.

Revenue Based Valuation

Consider how much the business can sell annually. Compare your annual sales with how much a business with similar annual sales and within the same industry is valued at in the market. You will need to have access to sufficient data or insights from the market to be in a position to use this valuation approach. Consulting professional valuers like Nash Advisory would help ensure you get a comprehensive and un-skewed report since they have access to significant market data.

Market Value based valuation.

This valuation model is similar to a revenue-based model in that you have to rely on market data to compare your business with other businesses within the same market. You compare your business to a similar business that was recently sold to determine the fair market value your business would fetch if you were to sell it.

Discounted cash flow analysis

This method is applicable when the future profits of your business are not certain or difficult to estimate. To use discounted cashflows, you will need to determine any future cash flows for your business and convert their value to present value. This will help determine how much your business will be worth in the future, thus arriving at the right price to sell it.

Go past financials

While crunching numbers is a sure way to know your small business’ value, there are other factors you need to consider when arriving at the value of your business. Consider things such as; Is the geographical location of your business within a growing and desirable area? Does your business have its loyal customer who could be transferred to a new owner if you sold the business? Is your business well reputable and respected among its peers? Does your business own rights to patents, copyrights, and trademarks? All these non-financial factors will definitely impact the value of your business.  

Knowing the value of your small business could be the first step to growing your business or could help you maximize your profit when selling the business.