Knowing the true value of your business is of utmost importance when you are considering selling it, searching for a partnership of investors, deciding on expansion, allocation of purchase price, want your insurance options to be addressed and many more. However, the problem here is that as a business owner you are more likely to see the endless potential of its earning power and all the cash you have invested in as well as blood, sweat, and tears you have sacrificed to get it off the ground. Considering these factors an entrepreneur tends to overestimate the real world value of their business. Doing so could hurt your chances of getting investors on board or it may create inaccurate financial projections. But do not worry, we are here to help you.
There are various small business valuation methods to do so, but, the amount you value your business at could vary depending on the method used. You should know some basics of small business valuation or use small business valuation calculator to be sure to sell your business at a fair price. However, you are a business owner, not a professional appraiser, so once you have an idea of your small business net worth, you should consult a business valuation expert to ensure you sell your business for a fair price.
Here Is How A Simple Business Valuation Expert And Calculator Help You.
Small business valuation calculator is a simple and quick way to value your business. These calculators are available online and for free, just enter the information on the valuation spreadsheet and the software will calculate your business’s net value. However, if you need a more personalized and in-depth valuation then hiring a certified business valuation expert is a better choice. There are various reasons to hire them such as.
To conduct business valuation there are different methods, approaches, and mathematical formulas used and the experts know each of them to efficiently determine the value yielding the type of results the entrepreneur is looking for.
Valuation experts examine the company’s books and determine the past earnings and then give an estimation of your net value which is often accurate.
Knows the Company and Its Undertaking
As projecting future cash flow is one of the most important aspects of business valuation the opinion from business appraisers regarding the manner in which the market will have an effect on the company’s future earning will be helpful. A business valuation expert understands the role and gives an accurate estimation.
Conducts Site Visit
Through site visits, professionals appraiser observe and assess the subject under valuation and validate the notes and findings with the data acquired from interviewing the company’s key personnel and from financial records to provide the true value of your small business.
Business valuation is a complex process with much room for error so hiring an expert will ensure that your business gets a fair and accurate value.
Now that we know that hiring a professional appraiser for your business valuation is worth the money. Let us get to know the methods and approaches they use to determine the value of the business.
Valuation Approaches Used
The valuation approaches determine the value indicative of a business usually for the purpose of insurance coverage or for the sale or purchase of the business.
This approach views the business as a set of assets and liabilities to determine the business value. Book and market value of assets are used in the approach and are significant for a business that is closed down and being liquidated.
As the name implies, the market approach relies on signs from the real marketplace to determine what a business is worth. The subject company is compared to other businesses or business interests that have sold.
The income approach seeks to measure the income generated by the business through its operation.
Commonly Used Business Valuation Methods
Discounted Cash Flow (DCF) Analysis
The DCF Method is the most thorough and valid way to calculate the value of your business. Within the income approach, this method depends on the concept that the value of a business is best estimated by the presently estimated value of the net income, cash flow or dividend streams it can generate in the future. By plugging the business’s estimated future income into a formula, a value can be set on the business in the present. However, this method is used only when cash flow information is not feasible.
Adjusted Net Book Value Method
Within the asset approach, the adjusted net book value method is the most commonly used strategy. Here all the assets and liabilities are adjusted to their fair market value. The net book value of all the assets owned by the business is established than other things like realistic sale value of certain assets in the current market regardless of their worth in the accounts is determined. However, a major shortcoming of this strategy is its ineffectiveness in accounting for unidentified intangible assets.
Multiples of Earning
This method involves developing either relapse analysis or a ratio of stock price to earnings. The price/earnings ratio varies according to the type of industry the company is in and the profitability of the sector. For large companies, the ratio will be higher whereas for small businesses it may be less than half that of a larger.
There are many different small business valuation methods available, but the combination of the methods mentioned above will set a fair selling price.