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Here is how you can determine the market value of your small business

Posted by Neha De

January 6, 2022    |     4-minute read (662 words)

A business valuation is the process of calculating the monetary value of a company by taking into account such details as operating assets, intangible assets and cash flow. When you have an accurate idea of what your company is worth, you can leverage each new success and make informed decisions. 

A business valuation can help you in situations such as making intelligent investments, selling your company, applying for business loans, sharing equity with employees as well as setting and tracking growth goals. On the other hand, you run the risk of selling your business short without a proper valuation.

A business valuation also comes in handy in events like growing or expanding your company (helps raise money and focus your energy on areas for improvement), filing taxes, securing investment, setting a fair price for your workers (in case they want to buy or sell shares in your firm) and establishing a business partnership (or buying out an existing business partner). 

Steps for arriving at the right market value for a business

There are three standard methods for determining a company’s value. Which one you select will depend on your business model, income and plans for the future. Consider these steps to come up with a accurate valuation for your enterprise: 

  1. Classify intangible assets – Assign an estimated economic value to nonphysical assets such as company reputation, brand recognition and patents. 

  2. Collect and categorize existing financial documents – Keep your cash flow statement and balance sheet on hand to allow for an easy starting place for calculating the monetary value of your business. 

  3. Set a target for your company’s value and growth – Irrespective of whether you intend to sell your company, set a goal so you can track its  growth and establish future expectations. 
Once you are done getting your paperwork in order, consider adjusting your organization’s spending and how you use intangible assets as a way to infuse greater value into your brand.

Three techniques for small business valuation

The three basic methods for valuing a business: asset approach, market approach and income approach. Research and consider aspects of all three for the most accurate valuation possible.

The asset approach – The adjusted net value (or adjusted book value) is the simplest technique of the three. To get a basic valuation, subtract your company’s liabilities from the total value of its assets. This will most likely be the same value as seen on your balance sheets. 

The asset approach does not thoroughly look into intangible assets or additional expenses such as employee benefits and rent. This is why this method is best suited for small businesses that have a small team and minimal operating expenses.

The market approach – The market approach provides you with an estimated value for your business by studying the value of similar assets on the market. By calculating comparable assets, you can find out how you stack up against others. You can use this technique to determine the worth of individual assets, including your real estate, equipment or your company as a whole. 

Businesses may also benefit from knowing their net debt as a part of this approach. To arrive at that, make use of a ratio that compares your business’ cash flow to its debt. Ensure that you adjust for risks or benefits unique to your company that could impact its overall value. A high market share, a good reputation or unique patents will increase your valuation.

The income approach – The income approach looks at the worth of your organization. You determine the value of your company by looking at future projections of income and revenue. Once this number is calculated, it can be adjusted to take into account factors such as predicted growth periods, changing tax rates and market dips. 

The income approach is best suited for businesses seeking valuation to help with growth. Your resulting value may indicate the need for increased marketing, expanded product lines and/or additional funding to reach your goals.

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