16 January 2024

Discover How to Calculate the Worth of Your Small Business

By Ronald Smith

Ever wondered how much your small business is worth? Figuring out its value may seem like a complicated task, but fear not! In this article, I’ll guide you through a simple step-by-step process that will help you determine the true worth of your beloved venture.

Step 1: Assess Your Financial Statements

The first step on our journey is to gather all your financial statements, including your income statement, balance sheet, and cash flow statement. These documents hold vital information about your business’s financial health. Take a deep breath, and let’s dive into the numbers together!

Step 2: Understand Market Trends

Now that we’ve got the numbers, it’s time to explore the wider world. Investigate the current market trends within your industry. Are there any shifts happening? How is your business being affected? By understanding the market, you’ll gain valuable insights that will contribute to a more accurate valuation.

Step 3: Evaluate Comparable Sales

Remember how detectives search for clues to solve a mystery? Think of yourself as a business detective. Take a close look at similar businesses that have recently been sold. Analyze their sale prices and compare them to your own company. This will provide a benchmark for measuring your small business’s value.

Step 4: Consider Cash Flow Future

Now it’s time to peek into the future. What does your business’s cash flow forecast look like? Predicting future cash flow is a crucial aspect of determining worth. Consider factors such as projected revenue, expenses, and growth opportunities. By analyzing these elements, you’ll gain a clearer perspective on your business’s value.

Step 5: Seek Professional Help

Finally, don’t hesitate to reach out to the experts! Consulting with a professional business appraiser can provide invaluable insights and ensure an accurate assessment of your small business’s worth. They have the experience and knowledge needed to consider all the intricate details and provide you with an expert opinion.

Now that you’ve completed these five steps, you can confidently determine the value of your small business. Remember, this process may take time and patience, but the insights gained are well worth the effort. So, embrace your inner sleuth, crunch those numbers, and unveil the true worth of your thriving enterprise!

Discover How to Calculate the Worth of Your Small Business

So you want to figure out how much your small business is worth, huh? Well, you’re in the right place! Let’s start by getting an up-to-date valuation, even if you’re not planning on selling right away.

I had a chat with this guy named Mark Zyla. He’s the Managing Director of business valuation and forensic accounting at Acuitas, Inc.

Mark gave me the lowdown on why small business owners need valuations and what goes into them.

Time for a Reality Check

Mark pointed out some tough challenges that small business owners face.

You see, us small business owners are usually wearing multiple hats. We’re part of the management team, which means our cash flow can get mixed up as both a salary and a return on investment, he explained.

Show Me the Difference

So here’s the thing: smaller businesses need to clearly separate labor from investment, which isn’t usually a problem for bigger companies.

When it comes to valuing smaller businesses compared to bigger ones, there are more differences than meets the eye. Not only do their sizes vary, but their capital and tax structures also often differ. So, valuing your small business might present more challenges than you anticipate.

Take a Look at Three Approaches

Essentially, there are three different ways to determine the value of your small business.

The first approach is the income approach, which revolves around the cash flow generated by the business. Additionally, analyzing the transactions of competitors can provide valuable insights. This helps you understand what the market can bear.

Another option is the market approach. By comparing your business to similar ones that have recently been sold, you can gauge its value in relation to the market.

Lastly, there’s the cost approach, although it isn’t as widely used. This method involves calculating the cost of assembling all the assets of a particular business.

Take Goodwill into Account

When you decide to sell your business, there’s something important you must consider: goodwill. It’s an intangible asset that includes factors like the value of your brand name and your customer base.

But it’s not just limited to that. Goodwill can also include things like strong employee relationships and proprietary technology.

Now, here’s where small businesses need to be careful.

Developing Successors

I want to emphasize the need to distinguish between goodwill that’s attached to a person and the goodwill of the business itself, as Zyla says.

What does this mean? Well, it means that when you have successors within your business, the value of your business increases. It’s like having a safety net in case something happens to you.

In other words, don’t rely on just one person for the value of your business’ goodwill.

Keeping Up with Updates

Stay on Top

It’s important to keep track of the differences between what you own and what you owe. This is a good habit to have.

When you stay on top of these things, it shows that you are making progress and your value is increasing over time. At least that’s what Zyla says.

Considerable Intangibles

Every business is different, so the things that make them valuable can vary too. One example of something valuable but intangible is proprietary technology like software or special processes. Another example is having a highly skilled and trained workforce.

In some communities, having a well-known and respected name can also add value to a business. Zyla has a great example for small and medium-sized businesses that have a good reputation.

Establish Relationships

If you have strong and lasting relationships with your customers, it’s a big advantage. When people know and trust your products and services, they will keep coming back. This increases the value of your business.

So, if you decide to sell your company, the new owner won’t have to worry about finding new customers. They can rely on the existing relationships you’ve built.