Knowing the value of your small business has many benefits. Whether it’s tracking growth, planning for the future, applying for loans, or finding a buyer, a clear idea of the value of your business is crucial.
Your company’s products, services, customers and stakeholders all have a value associated with the overall value of the company. With the right tools, your small business can determine its financial worth.
What is a business valuation?
A business valuation is the sum total of the monetary value of a business. It takes into account details such as cash flow, operating assets and intangible assets. By considering the projected market value of the equipment and subtracting defined expenses such as payroll, rent and operating costs, this formula will give you a clear idea of the value of your business.
These numbers can be obtained if you have an existing accounting system.
Steps to enhance your business
There are three common methods of determining the value of your business. Choosing the right one can depend on your income, your business model and your plans for the future. Take the time to:
- Catalog of intangible assets. Assign an estimated monetary value to non-physical assets such as brand recognition, company reputation, and patents.
- Collect and organize existing financial documents. Having your cash flow statement and balance sheet on hand will provide an easy starting point for calculations.
- Set goals for the value and growth of your business. Whether or not you plan to sell your business, setting a goal will help you track growth and set expectations for the future.
Completing these steps will reduce confusion and wasted time when arriving at an accurate assessment. As a result of your research, you should consider adjusting your business spending and the way you use intangible resources to instill greater value in your brand.
Small Business Valuation Methods
The three main valuation methods are the asset approach, the market approach and the income approach. For the most accurate assessment possible, it is important to research and consider aspects of all three.
The heritage approach
The adjusted book value (or adjusted net worth) method is the simplest of the three. To get a basic valuation, you subtract your company’s liabilities from the total value of its assets. This will likely echo the value you see reflected on your balance sheets.
This method does not thoroughly examine intangibles or additional expenses such as rent and benefits. For this reason, the asset-based approach is best suited for small businesses that have lower operating expenses and a smaller team.
This approach provides you with an estimated business value by looking at the value of similar assets in the market. By calculating comparable assets, or compositions, you can determine how you stack up against others. You can apply this method to find the value of individual assets, such as equipment, your real estate, or your business as a whole.
Businesses can also benefit from identifying their net debt as part of the market approach. You can do this by using a ratio that compares your business’ cash flow to its debt.
You’ll want to make adjustments for any risks or unique benefits of your business that could impact its overall value. High market share, a positive reputation, or unique patents will increase your rating.
The income approach
The income approach is a forward-looking look at the value of your business. You determine the value of your business by looking at future income projections. This number can then be adjusted to respond to known variables such as expected growth periods, changing tax rates, or market declines.
This method is well suited for businesses looking for a valuation to help them grow. The resulting value may indicate a need for increased marketing, expanded product lines, or additional funding in order to meet your goals.
Why you should know the value of your small business
Having a clear idea of how your business is valued will allow you to make informed decisions and capitalize on each new success. Your assessment can help you in situations like these:
- Sell your business
- Share fairness with employees
- Make wise investments
- Apply for a business loan
- Setting and monitoring growth objectives
Without a small business valuation, you run the risk of selling yourself short. Meet with an investment banker to find out how you can manage your finances.