You may want to know what your small business is worth on the market for several reasons. You might be thinking about selling your business, acquiring a business partner, obtaining a loan or looking for investors. It’s not an exact science to evaluate your business, but certain principles must be followed when it comes to business valuation.
You can employ several methods to find the value of your company; depending on which method you use, the valuation of your company will vary. You can also employ the services of a virtual CFO to help determine the value of your company.
Methods for Business Valuation
Most methods for business valuation revolve around your company’s cash projections and financial history. Your cash flow forecasts and financial history will help buyers see that they are making a profitable investment. Here are three methods you can use to find the value of your business:
This method will look at your business’s liabilities and assets. When you’re using the asset-based method, you can find your company’s book value by subtracting liabilities from assets. For instance, if your business has assets worth $100,000 and liabilities worth $35,000, your business value will be worth $65,000 ($100,000 – $35,000 = $65,000). The book value will be the lowest price you should be selling your company.
This method involves comparing your business to other companies that have been sold in the market. You should look at the data from similar businesses and use that to value your business. For instance, if you own a restaurant and other restaurants in your area are being sold for $70,000, the value of your restaurant should be $70,000.
This method looks at the financial history of your business. You use your books to show buyers that your business is a profitable and low-risk investment. Most buyers take out loans to purchase a small business, so you need to show the buyer that your company generates enough profit to easily pay off loans. Your business value is going to depend on how efficient your business is at paying debts.
The income method looks at your cash flow and past profits. For instance, your projected net profit for the year is $90,000. You reach this projection by averaging net profits for the past few years. Hence, when you’re selling your business, it will be worth $90,000 on the market.
It’s a good idea to regularly conduct business valuation so that you can gauge the performance of your business compared to your competitors. It will also give you an idea of what your company is worth now and how much your company has grown over the past year. You will also get an idea of what your company is worth if you are looking to sell your business.