How to Value Your Business | Small Business M&A

Business valuation is not for the faint of heart. And yet, it’s a necessary part of business today. There are several different things to know about how to value your business if you’re going to be successful, starting with the basics and covering all the details. Sure, you could hire an accountant and enlist the assistance of a business valuation expert—those are all great resources to use. But wouldn’t it be nice to have some idea of how to do it yourself?

We’ve got you covered, and it’s easier than you think. Read on to learn all that you need to know about how to value your business and make sure that it’s close to accurate. For starters, there’s more than one way to go about it, so you’ll have to choose what works for you. 

Asset valuation

This is the most common, and simplest, method of business valuation. Essentially, you take the assets minus the liabilities, and that gives you a starting point for the value. Then, you simply factor in revenue and earnings potential to arrive at a number that’s much closer to accurate. 

Revenue valuation

You can also determine how much you generate with your annual sales and use that to figure out your value. Calculate your annual sales and then talk to a business broker or stockbroker about how much a business in your industry would be worth with a similar sales level. For example, they might tell you that the typical industry value is twice the sales. 

Multiples of earnings

This is a more relevant measure for an accurate value, in many cases. Simply take a multiple of the company’s earnings, also known as the P/E (price-to-earnings) ratio. You’ll need to estimate the potential earnings of the business for a few years out. If your typical ratio is 15, let’s say, and you project earnings of $200,000, you’d have a value of about $3 million. 

Discounted cash flow analysis

The discounted cash flow analysis is a little more complex, but it also can be done with the assistance of an online calculator. This formula looks at the annual cash flow of a business and then projects it for the future. Then, the value of future cash flow will be discounted to the current time, using what is known as a “net present value” calculation. These NPV calculators can also be found online. 

Beyond the formulas

Of course, there’s something to be said for taking the time to really assess the value of your business beyond all the number crunching. Yes, numbers are important. However, you will also need to factor in things like your geographic location, and potential strategic value if there were an acquirer in the future looking to buy. 

All of these elements could impact the value of your business. Therefore, you’ll need to consider each option so that you can get the most accurate business value for your needs. This could be to sell, refinance, or even just get some type of business loan. In any case, you might want to ask for a little help. 

What is the level of risk of your business? For example, high-tech industries like software are much higher risk than something like a clothing store or restaurant. Based on the level of risk, there’s a scale of rates that will help you value your business based on this alone. For example, no risk would be 3%, while high risk could be as high as 17%. 

This is why it’s helpful that there are online calculators to assist with this process. Of course, there’s also the assistance of professional valuation experts that you can rely on when you really want to make sure that you get it right. 

Does your intent affect value?

Don’t be confused by this one—we’re simply referring to why you’re valuing your business. Are you just curious? Are you trying to sell? Do you need to establish your market value for a loan approval? These are all situations where you might want to know the value of your business. 

In the residential world, there are times when value fluctuates based on the purpose. For example, a house may be worth $250,000 on the current market, but if the buyer isn’t selling, it may only be worth about $200,000 because part of the value is in the high market demand. Does business work the same way? Sometimes. 

Usually, your business value will be its value, regardless of the reason you need it. A loan officer and a buyer will see the same number, or at least a similar figure, when looking at the business valuation. The only time your intent really affects the situation is if you’re trying to get more out of your value than you think it actually has—in that instance, you’ll be lucky to find it unless you’re selling in a hot market where people are willing to pay more. 

Speaking of value, why not value your time by letting Smith.ai handle the details?

We’re tired just posting this blog—business valuation is a lot to take in. And on top of that, you’re trying to run a business. It can get exhausting, fast. Fortunately, you don’t have to handle it on your own. When you partner with the dedicated virtual receptionists at Smith.ai, you’ll get a 24/7 answering service along with a team that can assist with everything from lead intake and scheduling to live website chat, and so much more. 

And as always, it comes with a custom strategy to manage every last detail, no matter what your needs might be. While you’re taking care of your business, we’ll take care of the rest. Plus, we’ll scale with you over time so your solutions grow with your company. 

Schedule a consultation to discuss more about how the virtual receptionists at Smith.ai can help you improve business communications and admin tasks, and so much more. You’ll also reach us at hello@smith.ai or (650) 727-6484.