Best Ways to Determine the Value of a Small Business

If you’re a small business owner, you’ve most likely wondered: how do I calculate the value of my business?

This can be a daunting task but Loyalty Brands can offer a few easy solutions. Whether you’re applying for a loan, looking to sell, or raising new funds, you always need to know what your business is worth. It will give you the confidence you need when talking to prospective investors. Or it can ensure that you’re moving in the right direction.

Where to Start

A small business value calculator is one of the best ways to get started. With a little information about the business, this formula can give you a rough estimate of its worth.

This tool is the most common and easiest way to determine the value of a small business. Yet, this is a starting point. Many factors can affect your company’s value, and it’s essential to consider them all.

The most accurate numbers will always come from a professional. If you are considering selling, the best place to go is First Choice Business Brokers.

Factors for Determining the Value of a Business

There are a few different formulas you can use aside from the calculator. These methods are based on your company’s life-cycle and what you are looking to gain from an estimate.

Time-Revenue Method

The time-revenue method is best for a growing business. It will tell you what the greatest profit this venture can have. It’s great when looking to start a business or thinking about the next steps in a smaller company. This method will tell you how to value a small business based on revenue.

You need to know the actual value of your tangible assets. This number is the “floor” or the lowest amount someone would pay for your company. Usually, this is what it would be worth if you liquidated all your assets.

Next, you find the “ceiling” or the most someone would pay for your company. This number includes your annual revenue. It can also include current economic trends or expected future growth. The amount will be more accurate, the more factors you include.

Then you have the range you should expect someone to pay for your company. If the floor is $30,000, but the ceiling is $100,000, you know that your business is worth somewhere between those two.

This method is best for business with no earnings yet or other revenue-based issues.

Multiple of Revenue

This method will use small business valuation formula multiples. While it can sound complicated, here is an easy way to find a revenue multiple.

To find a revenue multiple, you divide the sale price by annual revenue. Since you don’t yet know what your company will sell for, you have to use comparables.

Let’s say you own a small repair business. One has recently sold for $500,000, and its annual revenue was $125,000. After dividing those, you get the multiple of the revenue, 4x.

The most reliable way to find a multiple is to use this calculation on five similar companies. Then you will find an average. Let’s say after those calculations; we got 3.6x. Then you would take your annual revenue and multiply it by that.

This number is a helpful ballpark. It doesn’t offer a lot of insight based on debt or other losses. It’s not a great determinate when looking to buy a business. But, it can be useful when looking at perspective growth or for other internal purposes.

Rule of Thumb Business Valuation

This method makes it quite easy to answer, how to determine the value of a small business. The rule of thumb gives a reliable range for potential buyers. It is often used to put in a company’s starting offer.

Like multiple revenue, this method uses a percentage of annual income. Unlike the process mentioned above, it doesn’t consider potential earnings or the value of similar companies.

Some easy websites will give you a quick overview of your business’s value. Now you can avoid doing the math yourself.

How to Value a Business Formula

These are some of the easiest numbers out there to use in combination with your earnings. While less accurate than other numbers, it offers a good average.

A steady business that’s well established will likely sell for 8x to 10x their current income. A company with heavy competition can expect to sell for 5x to 7x their profits. That number drops to 2x to 4x if there are few tangible assets or relies on strong management.

How to Calculate the Value of a Business for Sale

The seller’s discretionary earning method is best if you’re looking to buy a small business. This method is used only for small businesses and provides a reliable number for the buyer.

You start with profits before tax. Then you add back the salary the business owner makes and other benefits. Any non-routine spending should also be added back in, since the new owner may not spend those funds.

This calculation will give you what the new owner can expect to make annually. This method allows owners to see the potential of their new venture and usually results in a fair sale.

Loyalty Brands is Here to Help

The best way to value a small business is to have a professional evaluate your company. First Choice Business Brokers offers a reliable network of brokers who can help you through the process.

Selling, or buying, a small business can be a stressful event. These methods can give you an idea of what your company is worth, or it can help you understand what a professional is talking about. With the help of a professional broker you can be sure that you are making the right decision.

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