Knowing how to value a small business before you invest, acquire, or issue (or be issued) a loan is important for every ambitious entrepreneur. This process involves clarification on different ends, and as such, no two parties usually value a business at exactly the same worth.
For example, an MBA holder, after calculating the worth of your company, may come up with a different valuation than a regular investor may come up with. The problem is different individuals have varying circumstances for calculating a business valuation.
A regular investor may choose to value a highly unprofitable business weigh higher than a financial expert might, after all, profitable businesses are only what anyone in his or her sane minds should only invest in or loan to.
With these variations, this article focuses on showing you the most common business valuation techniques; how almost any investor or organisation trying to acquire your business would value it and make their offer.
Here’s how to value a small business:
See Also: 5 Warning Signs For You To Immediately Stop A Business Expansion
1). Start By Looking At The Business Assets:
An important area to pay attention to while trying to value a small business, is the worth of the business assets minus their liabilities. Liabilities only keep money going out of the organisation, and as such, are totally excluded from any business valuation process.
For example, when trying to value a construction company, you’d first have to take a look at their net assets, which largely includes the value of their equipments; such as the cranes, escavators, swamp buggies, pay loaders, bull dozers, road rollers, low beds, and a lot more. These assets would have been acquired if you were to start the business from scratch, but since you’d be valuing the business for an acquisition or investment, laying out the value of their net assets is the first step.
This business valuation method may not be the best route for any business owner, but for the investor or acquirer, because it is assumed that your company has no good will, and as such, will result in the lowest possible valuation for your small business or company.
The good will of any business is literally the difference between the value of a company’s net assets and the amount a person is willing to pay for it (market value).
If your business has no good will, then its valuation would be much lower and based on its net assets (assets minus liabilities).
2). The Financial Forecast Method:
How much profit do you think your business will be able to generate in the next few years? What is your future cashflow worth today?
These questions form the foundation of determining the discounted cashflow of any small business or company because, investors only want to put money in a business with a stable and almost predictable future cashflow projection.
You need to be able to determine how much money you’re going to make in the future, if you’re going to be profitable (and to what degree), and what your business would be worth if you attempt to sell it a few years down the line.
By determining how much profit you can generate and how credible your figures are, you can strike a good deal in the course of an investment or acquisition by using this method. If rather, your business only loses a lot of money and you’re trying to get the best deal for yourself, use the asset valuation method instead to determine its worth, so you can argue based on your company’s assets like land, equipment, and more.
See Also: 10 Harsh Truths Many Entrepreneurs Need To Hear
3). Or You Can Use The Comparables Method:
This method involves comparing your business to other similar businesses and how much they’re worth. You can determine the valuation of other companies in your industry based on how much they sold at or how much their valuations are publicly listed as.
If you’re having difficulties getting this information, you can talk to your lawyers, accountants, or any financial expert to help you figure out the price. It is important you use a mix of them because, lawyers tend to always overvalue a business, while accountants and financial experts tend to undervalue them.
By using these set of individuals, you’d have a great idea of what your small business valuation or company valuation is.
Some Last Words
While it’s a good thing to always value your company to know what it could go for, it’s never up to you to determine which method gets used. The decision entirely lies on the investors or acquirers, and so, you’re left in the waters in what business valuation method to follow.
When an offer eventually turns up, you could have your financial experts argue its valuation, so you can find a common ground and get a good deal that most likely favours both parties.
See Also: The Dos And Don’ts Of Writing An Amazing Business Plan
What are your thoughts on how to value a small business? Let me know by leaving a comment below.
