How Should You Determine the Value of Your Small Business?
There are quite a few reasons you might need to determine the value of your small business. One of the biggest reasons business owners start trying to learn how much their company is worth is to sell it.
Valuing a business correctly is important, especially since Firmex reports buyer-side interest is at an all-time high, yet the number of deals going through has fallen. In their report entitled “The Valuation Gap,” they point to the gap in value between buyers and sellers as the primary reason for this.
So if you’re a small business owner or even a mid-sized business owner, and you’re planning on selling, or even trying to get financing or investors, how do you get the value right? You may not realize how truly subjective the process can be.
Determine Your Approach
One of the reasons business valuation is seen as subjective is because there are different approaches you can take. Before you can start tallying everything up and come to a number, it’s important that you know which direction you’re going to take, and the up and downsides of each. For example, if you go with the most basic approach, which is based on assets, you may be doing yourself a disservice because this is likely going to lead you to the lowest value.
Once you have determined the particular approach you’ll use, you can move on to the actual valuation process.
Know Your Price Multiples
When you’re beginning to value a business, you’ll look at some different multipliers. The multiples you use may vary from other business owners, but in general some of the most common include revenue and cash flow. Once you have those numbers, you can use multipliers to get a relative estimate of the value of your business. One multiplier you might look at could be based on the average sales price of companies sold, for example. The particulars of the multipliers you use will often be based on your location and industry.
If you’re familiar with the real estate market, you have probably heard the term comps before. Comps are pertinent when you’re valuing a business as well, especially when you’re doing so in the hopes of finding a buyer. Looking at comps of the recent sale of a business that are similar to yours can be a lot simpler than choosing multipliers, but at the same time, this approach might not work if there simply aren’t comps that are relevant to your business. If you do want to see if this is something you could incorporate into your valuation, you can visit a site like BIzBuySell.com, which gathers comp data across industries and also geographic boundaries.
If you really want to make sure you’re getting it right regarding your valuation, and possibly save yourself some time as well, you might consider having a third-party come in and do it. Appraisers can be brought in to create formal valuations, and they can really delve into the details and look at the dynamics that are impacting your industry, and ultimately the price of your business.
As a final note, when you’re trying to place a value on your business, it can be tempting to turn it into an emotional experience or to try and price it too highly from the start. You’re ultimately going to be doing yourself a disservice, however, particularly if you’re looking for a qualified buyer.