Knowing the value of your small business has many benefits. Whether tracking growth, planning for the future, applying for loans or looking for a buyer, a clear idea of your business’s value is crucial.
Your company’s products, services, customers and stakeholders all come with an associated value toward the business’s overall worth. With the proper tools, your small business can determine its financial worth.
What is a business valuation?
A business valuation is the sum total of a company’s monetary value. It takes into account details like cash flow, operating assets and intangible assets. By considering the projected market value of equipment and subtracting set expenses like payroll, rent and operational costs, this formula will leave you with a strong idea of your company’s worth.
These numbers can be obtained if you have an existing accounting system in place.
Steps to value your business
There are three common methods for determining your business’s value. Choosing the right one may depend on your income, business model and plans for the future. Take the time to:
- Catalog intangible assets. Assign an estimated monetary worth to nonphysical assets like brand recognition, company reputation and patents.
- Collect and organize existing financial documents. Having your cash flow statement and balance sheet on hand will allow for an easy starting place for calculations.
- Set goals for your business’s value and growth. Whether or not you’re planning to sell your business, setting a goal will help you track growth and establish expectations for the future.
Completing these steps will reduce confusion and wasted time as you come up with an accurate valuation. Following your research, you should consider adjusting your business’s spending and how you use intangible resources as a way to infuse greater value into your brand.
Methods for small business valuation
The three primary methods for valuation are the asset approach, market approach and income approach. For the most accurate valuation possible, it’s important to research and consider aspects of all three.
The asset approach
The adjusted book value (or adjusted net value) method is the simplest of the three. To get a basic valuation, you subtract your business liabilities from the total value of its assets. This will likely echo the value you see reflected on your balance sheets.
This method does not thoroughly examine intangible assets or additional expenses like rent and employee benefits. For this reason, the asset approach is best suited to smaller businesses that have fewer operating expenses and a smaller team.
The market approach
This approach provides you with an estimated business value by examining the value of similar assets on the market. By calculating comparable assets, or comps, you can determine how you are measuring up against others. You can apply this method to find the worth of individual assets, like equipment, your real estate or your business as a whole.
Companies may also benefit from identifying their net debt as a part of the market approach. To do this, you can utilize a ratio that compares your company’s cash flow to its debt.
You’ll want to make adjustments for unique risks or benefits your company may have that could impact its overall value. A high market share, positive reputation or unique patents will increase your valuation.
The income approach
The income approach is a forward-facing look at the worth of your business. You determine the value of your business by looking at future projections of income. This number can then be adjusted to meet known variables like predicted periods of growth, changing tax rates or dips in the market.
This method is well suited for businesses seeking valuation to aid with growth. Your resulting value can indicate a need for increased marketing, expanded product lines or additional funding in order to meet your goals.
Why you should know the value of your small business
Having an accurate idea of your business valuation will allow you to make informed decisions and leverage each new success. Your valuation can assist you in situations like these:
- Selling your company
- Sharing equity with employees
- Making wise investments
- Applying for business loans
- Setting and tracking growth goals
Without a small business valuation, you run the risk of selling yourself short. Meet with a business banker to learn how you can manage your finances.