Valuing Your Small Business
August 15, 2016
By Michael A. Aversa
The needs for getting a business valued are many: bankruptcy, divorce, retirement, raising capital, death. And, seemingly, there are even more methods to value a business—with some using rather sophisticated models.
The key for a small business is to select a method that suits its particular needs and industry. Getting help from a professional, such as someone accredited in business valuation (ABV), can mean the difference between leaving money on the table and realizing a business’s full worth. Part of that person’s expertise is turning the value of the business from something subjective to something objective.
Below are a few of the more common business valuation methods. Keep in mind that the reality of the situation may call for a combination of methods:
An asset-based valuation looks at the total value of the company's tangible and intangible assets. Valuation includes inventory, equipment, intellectual property, staff, customers, and goodwill. However, you can’t look at assets without taking into account any liabilities. One drawback here is that earnings potential is not considered.
Here, you can come up with a future earnings value based on expected earnings that are discounted to arrive at their net present value. Or, you can arrive at excess earnings by totaling the company’s earnings before interest, taxes, depreciation and amortization and then multiplying that by some reasonable factor specific to your industry.
This is the supply-and-demand price for a business at any given time. You would examine the fair market value and sales of comparable businesses in your area.
Also, look at ways to enhance the business’s value prior to sale. This can include documenting sales and profits, upgrading technology, or cleaning up the physical plant. Finally, give some thought to the terms of the sale. Will it be an all cash deal? Will you provide financing?