Valuating Your Small Business: How Much Is Your Company Worth?

August 6th, 2013 by

“How much is my business worth?” is a question that is asked all too often by small business owners. Whether you’re trying to sell your business or are just planning for the future, it is important to take into account all of the intricacies of your business to get an accurate picture. In general, accountants or bankers will tell you that in order to discover what your small business is valued at you should take your assets and subtract your liabilities and the result is your worth. But this flat number on paper does not take into account a considerable number of variables that may affect your business’ current worth and its worth over time. To get an accurate idea of what you may be able to sell your business for, there are many factors you and your accountant should take into consideration.

Different Methods To Discern The Value Of Your Small Business

There are three major methods the curious small business owner can use to calculate what his or her business is worth. If the owner of a business needs to sell a defunct business quickly they can use the asset approach which determines the value of a business by adding up both tangible and intangible assets. The most common approach for a healthy business is called the market approach. This method produces a valuation based on a multiple of the company’s earnings in the past 12 months. The third and final approach is called the income method. This technique looks to the future and relies heavily on the projected value of current cash flow. All three of the above methods are appropriate in particular situations and it may be helpful to talk with your CPA to determine which approach is right for you and your business.

Don’t Discount The Little Things

The value of a business as a whole has more to do with the sum of little parts than many small business owners realize. Rather than simply looking at how much money you’ve made versus how much money you owe, it is prudent to take a look at your accounting practices and the employees you have working for you. For instance, one of the first things a potential buyer will look for in your business is a good management team. If the team that you have built around you does not instill confidence in a potential buyer, the multiple – the expression of the market value of an asset in relation to a key statistic that relates to the value – will suffer. In addition to the team you have built around you, it is also important to consider the expenses that you have filtered through the business as well. Though you may be saving pennies on the dollar in current taxes on your car payments or your children’s school tuition, if you are running these expenses through your small business you could be losing many times that on the future sale price.

Help To Optimize Your Business’ Value

Talking to your accountant about the valuation of your company can help you decide which variables of your business will drive it’s worth higher. When speaking with a qualified CPA, he or she can direct you towards decisions that will make your business more profitable should you decide to sell. For instance, are your billing practices keeping you in line with your competitors? By adjusting different practices within your business you can gain a competitive edge against like-businesses in the area thus increasing the value of your business.

Being aware of the valuation of your company can help you to insure that you are building a commodity that you can one day sell. To get a completely accurate and objective valuation of your business it is important to talk to your professional accountant.