Valuing your small business can be an overwhelming task to take on by yourself. Going through all the documents, financials, and other items needed are not always available, nor are they necessarily easy to understand if you have them at your disposal.
With small business accounting software becoming more prevalent, it is easier than ever to get a hold of this data about your business. In addition, the cloud has made data more accessible than ever before. Here are five simple steps you can follow to determine an accurate value for your small business.
Without knowing what you have, it is impossible to calculate how much it’s worth. You need to know all of your assets, liabilities, and equity to get a full view of what your business is worth. Suppose you have been using software to track your expenses and income. In that case, this information should be easily retrievable from those programs or with a few quick reports in most accounting packages.
There are several different metrics for determining what multiple your small business will command as it relates to its value. The two main ones are a revenue multiple and earnings multiple.
The standard industry rule of thumb for small businesses is to sell for 1-3 times their annual earnings income which includes any debts. It depends on your industry, but usually, this falls between 30 to 100 percent of annual sales dollars depending on how much your net profit is after all expenses.
Now that you have the numbers, it is time to determine the assets and liabilities of your business. To get an accurate picture of what your business is worth, you need to understand how much it owes in debts, equity from investors or owner contributions, retirement accounts such as 401ks or any outstanding loans.
The equity in your business is simply the difference between all of assets of the company and all of the liabilities. An analysis of a current balance sheet is one way to determine a minimum value for your business if it were to be sold today. You can also use a discounted cash flow (DCF) to determine the value based on how much money the business will generate in the future. Some valuation methods can that is why it is a good idea to hire a Business Broker.
Finally, the price of your business needs to be adjusted for things like industry factors. The multiple will vary based on what type of company you are operating. For example, if you are a service business in a highly competitive industry, your multiple will be less than a similar-sized manufacturing company.
This is the way to determine the value of your small business when selling it in today’s market. However, if you have no intentions of selling soon, this number can still help you get an idea of the worth of your company and will help you plan for the future and make better business decisions. Find out more about what you need know when selling a business in Florida here.