Many small business owners today only have a vague idea of how much their business is actually worth. Assessing the value of a company often takes place as a prelude to a major change, and is usually extremely time-consuming. Whether you need to assess the value of your business in order to sell it, merge with another company, apply for a business loan, attract investors or pass your business on to somebody else, the first step is to determine your company’s market worth. However, the biggest mistake that most business owners make when determining the worth of their company is not hiring the services of a professional.
Follow these tips to help avoid too-low or too-high prices.
Setting Your Price
The method or methods that you use in order to determine the price of your business will vary depending on the nature of your business and your industry. You should keep in mind that most prospective buyers will be implementing the use of their own formulas in order to determine a starting point for negotiations. The most popular methods used to valuate a business are:
- Asset valuation – Most often used in asset-heavy industries such as manufacturing and retail, asset valuation is a method that appraises the value of the company’s assets.
- Market valuation – Similar to selling or buying a home where comparisons are made to similar properties in the surrounding area, market valuation is when a business’ value is determined in a similar way by using industry-average sales figures as a multiplier.
- Income capitalization – This method takes into account important intangibles such as the market position and maturity of the business, the work force and management, turn rates and industry trends and sales projections whilst focusing exclusively on the cash flow of the business and return on investment.
- Owner benefit valuation – This method is most often used for businesses whose primary value comes from their ability to generate cash flow. To achieve a market value, this formula multiples the owner benefit by 2.2727.
Typically, small businesses will sell in a one to three times multiple of the owner benefit valuation figure. As this is quite a wide range, it’s important to understand how to determine what to apply. One of the best mechanisms to use to do this is that a one-time multiple is for those business where the seller is the business, such as consulting businesses, one-man businesses and professional practices.
The three times ratio is used for those businesses which have a strong track record, historical growth patterns, an established client base, and have been in business for three years or more. Other businesses will most likely fall somewhere in between the two. The best way to determine this is to consult a professional consultant, such as the ‘Sell My Law Firm’ experts at LawBiz.
Are you looking to value your business? What are your reasons for finding out how much your business is worth, and what do you plan to do with the results? We’d love to hear from you in the comments.