If you’ve been wondering how to value a small business, the team at Advanced Business Brokers is here to help. As a full-service business brokerage firm, we’re committed to helping our clients sell or purchase small- to medium-sized businesses. Aiming to make the process worry free and comfortable, we have experts that specialize in determining the value of businesses in a wide range of industries. Everyone wants it to be simple math… take a number (say earnings) and multiply that by a number (say an industry ‘multiple’) and fill in the check. That certainly would be easy, and could be a good place to start, but there are many factors, unique to each business and each buyer, that will affect the final price of a business being sold.
But how do you accurately gauge the value of a business? First it is good to understand there is a difference between value and price. Value will depend on the purpose of needing a value (IRS, Estate planning, Insurance, Selling or selling a minority stake and more). Price is determined by the market, but it helps to understand how the market and different buyers may look at your business to have realistic expectations. In today’s post, we’re going to overview the current methods to determine value, and how that may translate into setting a realistic price for your business.
There are three main ways to value a business: asset value, income value, and market value.
Asset value: Often the lowest value. In keeping things simple, this is the value of all the pieces and parts sold separately and then subtracting any debts. Sometimes when a business has lots of equipment, but revenues and profits have been down it can be the best value to expect. An orderly liquidation and selling of equipment is preferred over a forced liquidation ‘fire-sale’ of the business assets.
Income value: This is why most buyers are buying a business opportunity, for the future income stream and profitability. This will depend on accurately forecasting and predicting future cash flows and factoring in risk adjustments and then discounting the future value back into a present value. Assumptions and an expected rate of return needed for the amount of risk being taken will differ for each business and prospective buyer.
Market value: This is the most common starting point for small businesses looking to sell. In this approach, the value of your business is established by comparing your business to other businesses similar to yours that have recently sold. While this approach can be fairly useful, there has to be an ample number of similar businesses sold to get great results. The amount of risk in being a business owner, especially from factors outside of your control, tends to compress the market values of smaller companies especially for those with cash flow under 1 million.
At Advanced Business Brokers, we know that it can be challenging to assign a value to a small business. Whether you’re the owner or the buyer, you’ll want to be certain that you’ve arrived at a realistic figure. When we value a business, we take a holistic approach. We look at its fundamentals, its history, its competition, its relationships, and much more. So, if you’re looking to buy or sell but aren’t sure how to value a small business, reach out to us today so that we can help.
If you’re thinking about selling your business and don’t know where to start, consider speaking with our team here at Advanced Business Brokers. We specialize in brokering and advising exit plan strategies for various sizes/sectors of businesses.
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