Determining the value of your business is essential if you plan on selling it. If you?ve ever watched the hit show Shark Tank, you?re likely familiar with the reality that entrepreneurs may want to believe their company is worth something — but that doesn?t necessarily make it so. Like it or not, there is an established methodology for determining the value of your business that you?re going to need to follow. Let?s review.
Common Valuation Methods
Yes, there?s more than one, and that?s one of the reasons business valuation can become complicated rather quickly. Typically you will need three to five years of historic income statements in order to come to an accurate valuation.
There?s an asset-based valuation, which involves totalling together the business?s intangible and tangible assets. Of course, this isn?t good for evaluating the value of future earnings; this is more common for liquidations of defunct companies.
Many companies will instead choose to assign a value using the earnings multiplier method. Using this methodology, some of the value is based on the business?s earnings potential, so that buyers can understand what a likely return on investment estimate will be. Even this methodology, though, has certain drawbacks. The valuation needs to accurately reflect both industry standards and business risk.
How Can You Improve Your Business?s Value?
In many cases, the earlier you receive small business valuation services, the better, because once you have a number in hand you can work to improve it until it?s time to actually sell your business. It can take several months, though, to get your number up to where you want it to be.
Basic organization is one way to get your numbers in line. Although the hard number of your business valuation will matter, it?s also important to have clean, carefully maintained financial records, a tidy storefront, et cetera. Just like with a new home, buyers like to be able to visualize themselves in the space — not be constantly confronted with the remainders of your mess.
Seller financing can also be an essential tool for gaining a sale. Not all sellers will be able to do this, but for the ones that can it can serve as an important incentive for potential buyers.
Will you be using small business valuation services in the future to get an idea of what your company is worth? Let us know!
