3 Business Valuation Methods For A Small Business

For small business owners, profit matters a lot. It’s more than just numbers in your accounting books or extra spending money. Your business’s profit directly affects how much your business is worth. Simply put: if you want to know how much you could sell your business for, you need to understand its profits. All business valuation methods for a small business will take into account it profits.

Profit not only makes you love your business; it also makes people who could buy it fall in love with it.

3 Business Valuation Methods For A Small Business

For small businesses, there are 3 business valuation methods which are most common. By ‘small’, we mean businesses making less < $2M in annual sales, sometimes also referred to as ‘Main Street Businesses’.

Method 1: Multiples-Based Approach

The Multiples-Based Approach is a common method to determine a business’s current value through comparison. It evaluates a company by comparing it to similar businesses in the same industry, known as ‘comps’. To find a company’s market value, one looks at recently sold comps, compares the valuation to their earnings (of profits) and then derives a multiple. For most industries, you can also find the most recent multiples online. This multiple is then applied to your own profits to get to a valuation for your business.

Related Content: Top 6 Online Businesses With The Highest Value In 2024

The Multiples-Based Approach provides a relative value and, when combined with other methods like the 2 below, can offer an accurate picture of your company’s value. This method should be used as a sense check and in conjunction with other methods as no two companies are the same.

Related Content: Understand How Much To Sell A Business For

Method 2: Income-Based Approach (Discounted Cash Flow)

The Income-Based Approach is commonly used to value operating (read: active) businesses. It calculates the current business value by projecting its future cash flows. This means estimating the expected net income over time and recalculating the present cash flow.

This method is a core component of how a small business is valued, as it is a reflection if its growth potential.

Method 3: Asset-Based Approach

The Asset-Based Approach, or Adjusted Net Asset Method (sorry about all this lingo) is the third valuation method most commonly used for smaller businesses. This method considers a company’s present value as the difference between the fair market value of its net assets and its liabilities. It is particularly effective for valuing real estate, such as new construction or commercial properties, or asset-heavy businesses.

Related Content: How To Increase The Value Of My Business

What Information Is Needed To Calculate Business Value?

Here’s what information you will need in order to be able to calculate the value of your small business:

• The date the business was created
• The industry and sector you operate in
• Region of operations
• Legal structure
• Number of employees
• Last 3 years financial statements (Income Statement and Balance Sheet)
• Details of working capital (Debtors, Creditors and your Bank balances)
• Future financial forecasts and expectations (a rough estimate based on what you know about your market is sufficient)
• Your current knowledge of how your business operates, your customers, growth, risks you are aware of and how much your business depends on you.

For more complex businesses, like lower middle-market or public traded businesses, lots more of additional specific information is required.

Calculate Your Business Value Now

You can get a business valuation report online for free and get the results immediately.

Here’s how you get such a report:

• Step 1: Gather the information listed above, to make the process smooth sailing.
• Step 2: Use a free calculator like this one and put your info in it.
• Step 3: Instantly get an estimate of your business value.

Related Content: How to come to terms with a low business valuation

Conclusion: 3 Business Valuation Methods For A Small Business

For small businesses, there are 3 common business valuation methods: the Multiples-Based Approach, the Income-Based Approach and the Asset-Based Approach. A good valuation tool will take into account all 3 business valuation methods for a small business.