Did you know 98% of small business owners don’t know the value of their company? If you’re thinking about selling or have an interested buyer, understanding the value of your business is important when negotiating the best possible deal.

Here are four ways you can calculate your business’s value.

1. Asset-based method 

The asset-based method determines the value of a company based on its net assets, which can be calculated by subtracting total liabilities from total assets. Liabilities are things like debt/loans, outstanding supplier payments, accrued employee wages, etc., whereas assets could be business-owned real estate, equipment, inventory and cash in the bank. For example, if your company has $500,000 worth of assets and $200,000 worth of liabilities, its asset-based valuation would be $300,000 ($500,000 – $200,000 = $300,000).

This approach comes directly from your accounting/record keeping, which should make it easy to find the valuation of your business. If you work with a business consultant or accountant, you may want their help identifying assets and liabilities.

One thing to note: since this method works as a snapshot of current value, it may not consider future revenue or earnings — both of which are important in the valuation of your business. 

2. Income-based approach

The income-based approach is the most common as it looks at future income projections to estimate a business’s value based on the cash flow it’s expected to generate over time. This valuation method is meant to help investors understand the risk of their purchase or investment and is often used by companies that have a stable and predictable income stream.

3. Times-revenue method

The times-revenue method is a common method for business owners to determine the maximum value of their business. It does this by multiplying its revenue over a set period of time by an industry multiple, which is a ratio used based on the sales price of other similar businesses. (Company Value = Revenue of the Company × Industry Multiple).

This method can help establish a ceiling for the highest possible price of a business. It’s most commonly used by small businesses with varying monthly profits.

4. Nonfinancial considerations

While numbers provide valuable insights, it’s also important to consider nonfinancial aspects. For instance, your company’s growth potential significantly influences its market value. Buyers are unlikely to invest in a business that lacks expansion opportunities. Factors like the future use or diversification of your products and services play a vital role in determining your business’s value. Additionally, workplace culture and core values are essential, as they affect employee retention, productivity, and customer satisfaction. These elements greatly impact the long-term financial performance and worth of any company.

Speak with a business advisor, appraiser or accountant.

Selling a business should involve at least three years of planning, including talking to a Certified Public Accountant (CPA) or an appraiser through the American Society of Appraisers.

• A CPA is a valuable resource when selling a business because they provide accurate financial analysis, tax planning, and more. They can also help sellers ensure they are not underselling the business or missing out on important opportunities.
• Alternatively, appraisers provide an unbiased value assessment of any asset, which can be a helpful resource in determining the value of a business. Online calculators may be misleading and provide business owners with the wrong information, making professional guidance valuable.

Ultimately, when you’re looking to sell your business, doing as much research and planning as possible is critical to the future success of any business owner.

For more tips and tricks, visit our Business Success page at efirstbankblog.com.

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