Did you know that 48% of business owners who started the business to sell someday with a profit have no real exit strategy to do so? The first step in selling a business is always business valuation.
It’s highly important to do an accurate small business valuation because if you screw up on that, you could lose out on a huge earning potential.
Don’t have the first idea of how to value a business? That’s why we have created this short guide below to help you out.
Different Small Business Valuation Methods to Consider
There are three valuation methods to consider when selling a business or going through a business acquisition. Let’s go into them in detail below.
Asset-Based Valuation Methods
In this method, you would take a total of all the assets your business owns and put a combined market value upon them. Anything that can be sold or bought in your business counts. These include items such as real estate, automobiles, patents and trademarks, websites (and social media), and any equipment or inventory.
Under the asset-based valuation method, there are two further ways to dig deeper:
- The Going-Concern Approach – values the assets by assuming that the business will remain profitable in the future
- The Liquidation Approach – values the assets when the business files for bankruptcy or goes out of business
As you can see, it gets quite complicated and can take quite a bit of time, especially if you have hundreds of assets to account for.
Market-Based Valuation Methods
If you are in a business where many other similar businesses have been sold for a profit in the recent past, then you can use this method to evaluate your business. Similar to the real estate market where property values are affected by nearby properties, your business valuation will be greatly affected by similar businesses sold recently. It’s a comparison game, after all.
Income-Based Valuation Methods
This method pins the value of a company based on its capacity to keep earning profits in the future. This is quite a complicated valuation method and should only be done in consultation with a trained accounting professional. A miscalculation of cash flow or capitalization rate here can result in thousands of dollars of lost revenue.
Take Your Time When Selling a Business
Even though you should take your time with a small business valuation, this doesn’t mean that you need to get into a state of analysis paralysis and delay selling your small business indefinitely. It would be easy to get into a trap of thinking that you will never get the numbers absolutely accurate and maybe it’s better not to sell.
You got into this business with the idea that you would sell one day so don’t sell your future short. Take your time, make the decision, and then let go once the business acquisition is complete.
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