Valuation is one of the most important aspects for small business owners looking to sell or get the full picture of their company, and yet, it’s also one of the most confusing. Many small business owners consider the thought of putting a dollar value on their company as a touchy subject, but it’s something that many will encounter at some point.
One of the key elements to understanding valuation is knowing exactly what it means. The actual value of your small business is the price that someone is willing to pay for it in the business-for-sale marketplace, and not just what you come to value it for through various means; a small business may be priceless to its owner, but in the real world, everything has a viable price tag. Here are some helpful tips to determine your small business’s valuation in modern times.
Ways to evaluate your small business’s valuation
Starting the process can happen a number of ways for business owners, but everyone eventually settles on a final number in the end. Getting there can be complicated thanks to many different, and acceptable valuation methods, including:
- Asset-Based Valuation – A popular method, asset-based valuation is very straightforward in its approach to putting a number on things. Tangible and intangible assets are both included within this method to determine a value. As a downside, it can also oversimplify the results, and may miss some important aspect of a small business’s earnings potential. This process is most often used with liquidation sales and defunct businesses, though it can be practical in some modern small business sales.
- Earnings Multiplier Method – For many small business owners, this will be their most logical choice. Owners use this method to base their price on some multiple of the company’s earning potential, and thus, potential buyers can translate the deal into terms of a long-term return on investment. And since many small businesses use this method, they’ll be able to compete with a healthy valuation in the open marketplace.
Increasing your small business’s valuation
If you’re disappointed by a lower-than-expected value for your business upon valuation, there are options for you to boost those numbers, especially before a sale. The first step is to document all of your positive cash flow and profits over the course of multiple years. The more you have to demonstrate your financial successes, the more attractive your small business appears to buyers. Perhaps the biggest change a seller can make, however, is to strategically position their company within the marketplace so as to not only take advantage of their strong suits, but also to isolate a corner of the market where they alone can maximize profits. A final aspect of improving your valuation is basic organization, which is a simpler change, but one often overlooked. A well-structured company is one that potential buyers see as a turnkey proposition, and thus, much less of a potential risk.
This article was written by Michael Ferro for Small Business Pulse