Sure, your small business is valuable. But how valuable is it really? How do you go about finding its value? It’s easy to have an emotional tie to your business. After all, you’ve grown it from the beginning with extensive time and energy. These emotional ties can easily inflate your small-business value perception — a major roadblock to successfully selling or merging your business. It’s also an easy way to turn off potential investors.
Even if you’re not thinking about selling, merging or adding investors, getting a professional appraisal of your business can shed important light on what’s working and what’s not. It can provide a road map of where you need to be allocating resources and areas that can reap the most financial benefits. Once you break down your cash flow based on your offerings and services, you’ll reveal which have the most potential for revenue growth.
How Do I Determine My Small Business’s Worth?
To find your business’s value, you need to do more than just multiply your current cash flow by a number of years to project forward. You need to consider your assets and leverage. Then you need to add the prospects for your location, industry and local employees.
Don’t overlook the economy at large, too. While some markets may be down, others like manufacturing, restaurants and services can experience higher sale prices.
That’s it, right? Not yet. You also need to take into consideration your intangibles, such as your employee’s creativity and your intellectual property. Without professional help, a true valuation of your company is difficult to acquire on your own.
Who Can Help?
When you’re ready to find the true value of your small business, you’ll want to enlist the services of a valuation expert. Typically, certified public accountants serve as valuation experts. Check with either your state CPA association or the American Institute of Certified Public Accountants.
You can also find an appraiser by contacting national appraiser associations, such as the Institute of Business Appraisers, the National Association of Certified Valuation Analysts and the American Society of Appraisers.
If your goal is to sell your business, a business broker can provide accurate small-business valuation. Find one through the International Business Brokers Association. However, it benefits the broker if the sale occurs quickly.
Getting the highest sales price for your small business may not be his or her first priority.
How much can you expect to spend on a professional valuation service? Plan on at least $3,000. Valuation experts can charge upwards of $5,000. If you’re selling, brokers also take a commission — typically at least 10% — at the time of the sale.
Another alternative is to use an online business valuator tool. This free service gives you an estimated value of your small business. It reveals areas of your business that offer the most promise or a starting point to begin the sales, merge or new-investor acquisition process.
Where Do I Start?
Start by gathering your small-business paperwork. You’ll need documentation from the last five years on profit and loss, benefit plan details, liabilities and assets. If you’re working with a professional appraiser, you could spend months going through your business’s financial statements.
How Do I Calculate My Small Business’s Worth?
You can calculate your small-business worth in one of three methods. You can either:
1. Review your company’s assets
2. Review prices of similar businesses
3. Review your cash flow
The first option is ideal if you need to sell quickly or are a newer business. A small-business appraiser will take your hard assets — from machinery to real estate — and subtract any liabilities from their sum. Depending on your industry, the future revenue potential of your small business may not be factored into the valuation. This means you could lose cash on the sale. Reviewing assets can also misrepresent the true value of a small business. For example, your small business may not have many assets, but it could be bringing in significant revenue.
The second option means your small business’s location plays a significant role in the valuation. The largest downside of reviewing prices of similar businesses doesn’t take into consideration those resources that make your small business stand apart from others — such as your proprietary project management process or forward-thinking management team.
The third option is the most common one. You can take your cash flow and subtract your expenses. If you’re a smaller business or start-up, this might be your best bet because it’s easy enough to do on your own.
Which one should you choose? If you’re selling your small business, you may benefit from completing all three — then use the results to create a strong case for the high value of your business.