Whether you are hoping to sell your business, or you simply just want to know how much your business is worth, it’s important to know how to value a small business. For the purpose of selling, it’s key that you are able to get the best possible deal. By knowing the value of your business, you have a better chance of negotiating a good deal.
At the end of the day, any business is worth as much as a buyer is willing to pay, but you should be equipped with all the right information to try to get a good deal. By understanding how much your business is worth, you might also learn some ways to improve the value before it comes to selling.
In this guide, we’ll offer some advice on how to value a small business, including the different methods and what factors can affect the price.
Factors that can affect the value of your business
No matter what type of business you own, or what industry it is in, there are a number of factors that can affect the value of your small business. If you’re hoping to sell your business, the first factor is why you’re selling.
It’s important that when it comes to sell, your business is in a good position. The value of your business can be affected if your business is under potential threat of liquidation during the next 12 months. This is why it’s advised to sell your business when it is doing well, not when it is struggling.
If you are retiring, or selling the business because you aren’t well, this may reduce the value of your business. This is because buyers will assume you are just trying to force a sale through quickly.
The second factor that can affect the value of your business is the value of any tangible assets. This includes equipment, property and any other physical aspects of the business.
The third factor is the reputation of the business. If your business has a poor reputation, or is still in its early stages, it is more of a risky purchase and the value will decrease. However, if your business is held in high regard by customers and the industry, you will find it is worth a lot more.
The best methods to value a small business
There are a number of different calculations you can follow in order to value your small business. The first is price to earnings ratio. This is worked out by dividing the profits after tax by the earnings ratio. The higher the ratio, the better rated the business.
Entry cost is another way to value a small business. This is how much an entrepreneur would have to invest in order to start a similar business to yours. To work this out, you should consider the costs of financing a start-up, investing in staff and developing products.
Once you’ve reached an entry cost valuation, this is compared to the sale price of your business. This method can give a realistic idea of whether it’s more cost efficient for a buyer to buy your business, or just start their own.
Another popular method of valuing a small business is asset valuation. This method doesn’t involve any future earnings calculations. Instead, it helps to create a business price based on what the business assets are worth after loans or debts.
Knowing the value of your small business can provide a full picture of what risks you might face, and what improvements you could make to your business in order to make a future sale.