How to Determine The Value of Your Business?
When it comes to selling your business there is a lot of questions and important decisions. One of those choices is deciding on a price for the business.
There are many methods to find the valuation of a company. The amount you value your business at could vary, depending on the method you use.
You should learn some basics of small business valuation to be sure you sell your business at a fair price. But, you are a business owner, not a professional appraiser. Once you have an idea of your small business net worth, consult an appraiser for a company valuation to be sure you sell your business for a fair price.
Business valuation methods
Many business valuation methods involve your business’s financial history and cash projections.
The financial history and cash flow projections of your business help buyers understand if their investment is going to be profitable.
Here are three options to find the valuation of a business.
Method 1: Income
This method looks at your business’s financial history. Using your books, you demonstrate to buyers your business is a low-risk investment.
Often, a buyer takes out a small business loan to purchase a company. Demonstrate to a buyer your business can generate enough profit to pay the loan. The more efficient your business is at paying debts, the more valuable it is.
The income method focuses on looking at your past profits and cash flow.
Using your profit and loss statement for small businesses, project the future profits and debts of the business. Using the projections, you can find your small business valuation.
The business will earn a net profit of $100,000 in the near future.
You project this figure by averaging net profits from previous years.
With the income method, you can sell the business for $100,000.
Method 2: Asset-based
With this method, the value of your business is calculated by finding the difference between assets and liabilities.
With this method, you look at your business as being made up of smaller parts. Some parts add value to your business which are known as assets.
Other parts of the business add debts to your business. Liabilities are debts your business owes to creditors. To find the value of your business, subtract liabilities from the assets.
if you have $500,000 in assets and $100,000 in liabilities, the value of your business is $400,000 ($500,000 – $100,000 = $400,000).
With the asset-based method, you can find the book value of your business. Your book value is the owner’s equity on the balance sheet.
Responsible business debt management can help you increase your net assets.
Consider using the asset-based method if you need to sell your business fast. If you are selling to pay debts, you may save time and money by offering book value.
Method 3: Market
This method compares your business to similar companies that have sold.
Let’s say you own a barbershop. Other barber shops in your area are selling for an average of $120,000. Using the market method, you would sell your salon for about $120,000.
The market method offers an amount close to the fair market value. You must increase or decrease your business’s price, depending on what buyers will pay.
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