The term “small business valuation” frequently arises when owners consider attracting investors, negotiating an M&A, or planning for succession. However, a successful business sale heavily depends on an in-depth understanding of the company's value. Whether you are liquidating or selling to a new owner, an accurate valuation matters most for a mutually beneficial deal.
Do not worry. In this blog, we will walk you through a step-by-step process of determining your firm's value, giving you valuable insights for more informed decision-making.
Today, we will discuss four key steps to calculate the accurate value of your small business, which are as follows:
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Company valuation is the process of evaluating a business's worth by analyzing many factors, mainly used by owners planning to exit the company.
These include tangible assets like equipment, inventory, and real estate, as well as intangible aspects like forecast earnings, management structure, and stock price. Business owners can use valuation for different purposes, such as:
However, aside from monetary value, business valuation is integral in resolving issues stemming from divorce settlements, estate taxation, and shareholder disagreements. In legal cases, courts may appoint forensic accountants to perform independent valuations.
Wondering how to calculate the valuation of your business? Here’s a list of key terms and concepts you should know before you start assessing your company value:
Key term
What does it stand for?
Book Value
A company's accounting-based value is calculated by subtracting total assets from total liabilities. It shows the company's net worth according to its financial statements.
Fair Market Value (FMV)
The real value of a business is based on a hypothetical transaction between a willing buyer and seller, where both parties are aware of the business's conditions.
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
A measure of a company's operating performance that excludes non-operating costs such as interest, taxes, and depreciation.
Discounted Cash Flow (DCF)
A valuation approach that calculates a company's future cash flows and discounts them to its current value.
Capitalization Rate (Cap Rate)
Estimated by dividing a property's net operating income by its market value. A higher cap rate usually signals more risk and/or a lower expected return.
The Multiples Method
It is a valuation technique that compares a business's financial metrics (e.g., EBITDA, sales, or income) to competitors or industry averages.
Market Capitalization
It refers to the total dollar market value of a business's outstanding stock, calculated by multiplying the total volume of outstanding shares by the current market price per share.
Goodwill
Refers to non-identifiable assets like brand reputation, client relationships, and intellectual property.
Liquidation Value
The expected amount that is collected if all of a business's assets are sold separately and its liabilities are satisfied (often less than the market or book value).
Net Present Value (NPV)
A method in discounted cash flow (DCF) valuation that calculates the present-day value of future cash flows minus the initial investment cost.
Tangible/Intangible Assets
Physical assets like machinery, buildings, and land are tangible assets. Non-physical assets, aka intangible assets, include patents, trademarks, and goodwill.
Leveraged Buyout (LBO) Valuation
A technique for borrowing a large amount of money (bonds or loans) to pay for the acquisition of another company.
Minority Discount
A decline in the value of a minority ownership interest in a company is caused by a lack of control and marketability associated with minority stock.
The Control Premium
Refers to the amount a buyer is ready to pay over the current market price for a controlling stake in a company.
Due Diligence
An in-depth evaluation of a business, carried out by a prospective buyer, mostly to establish its assets and liabilities and appraise its commercial potential.
If you're planning to sell your company or secure an M&A, here are some methods to calculate the value of your business:
The income approach to business valuation focuses on a company's projected revenue in the future. It calculates the worth of a business based on the predicted future income. It uses two common methods:
Adjusted Net Asset method finds the difference between a company's assets (adjusted to fair market value) and its liabilities. This strategy is notably effective for businesses with large investments or real estate and those who are unprofitable or considering dissolution.
To do an asset-based valuation, you must first list your assets and assign them a monetary value. This value gives you a good idea of the company's material worth.
This approach calculates a company's value by evaluating the purchase and sale prices of competitors in the same industry. A comparative analysis can offer significant insights into the appropriate selling or buying price.
Moreover, a market-based approach is particularly beneficial for fast-growing businesses and industries where market trends and valuations can change quickly.
As we’ve learned, small business valuation is a complex process requiring a diverse strategy. Though there are various approaches, the following key steps offer a strong starting point:
First things first, focus on the company's tangible and intangible assets. You can derive a rough approximation of the company's value by subtracting liabilities from assets.
Intangible assets such as brand reputation, client loyalty, and intellectual property symbolize a significant portion of a company’s overall value, often contributing to long-term sustainability and competitive advantage in the market.
So, look at your company's unique characteristics and how they contribute to its value.
Analyze your financial statements, including your balance sheet and income statement, in detail to understand your business’s financial standing. Some other metrics you can track are:
Learn more about the difference between SDE and EBITDA in our guide.
Comparing your company to similar companies in terms of size, industry, and revenue can help you better understand its market value.
Note: Every business is unique, so direct comparisons may not always be accurate.
Apart from EBITDA, here are four common factors that influence a small business valuation:
It's not easy to accurately value a small business for a profitable exit. Exitwise is dedicated to guiding you confidently and clearly through this path. Our team of exit professionals has helped countless business owners successfully exit over time.
We realize that every company is unique, so our strategy is customized to meet your needs. We're here to help you prepare for a seamless and successful exit, from accurate business valuation services to connecting you with top M&A professionals.
So why wait? Schedule a call with our team at Exitwise today to start creating the exit strategy you deserve.
Here are some of the most frequently asked questions about determining the value of a small business:
A business valuation professional, such as a certified public accountant (CPA) with valuation experience or a company appraiser, can be extremely useful in estimating the value of a small business.
Our team of M&A experts has the expertise and skills to evaluate various valuation methods, such as asset-based, market-based, and income-based approaches. To arrive at an accurate valuation, our experts can collect necessary data, examine your company's financial health, and consider industry-specific aspects.
Let Exitwise guide you through the process, ensuring a smooth and profitable exit. Schedule a call with us today.
The cost of a business valuation may vary depending on multiple factors, such as the size and complexity of your business, the valuation methods used, and the level of data necessary. While it is difficult to provide an exact amount, getting quotes from industry-leading professionals can help you get an idea.
The industry in which a company operates can greatly influence its worth, as it may have specific methods or factors. For example, IT businesses can be valued based on their growth potential and market share, whereas manufacturing businesses can be assessed primarily based on their asset base and profitability.
Some common multiples used in small business valuation are:
By following the step-by-step instructions in this blog, you can get an in-depth grasp of the key valuation methods and their relevance to your company. Remember to collaborate with an accredited business valuation specialist, such as Exitwise, to get accurate and reliable results.
With over two decades of experience advising business owners, we'll guide you through the valuation process and link you with top M&A professionals specializing in your business needs. Book a call with us at Exitwise today to get started!
Let Exitwise introduce, hire and manage the best, industry specialized, investment bankers, M&A attorneys, tax accountants and other M&A advisors to help you maximize the sale of your business.
