How much is your business worth? Most small business owners don’t think about this question until it’s time to either sell the business or borrow money to grow the business. Figuring out the value of a business can be complicated and time-consuming, but if the need arises, here are a few tips to get you started.
- 1. Tailor your business valuation to its purpose. If you only want the information for yourself, the general rule of thumb for small businesses is that a business is worth 3-1/2 to 4 times its gross annual earnings. If you need a more thorough valuation, consider which of the following common valuation methods best fits your business:
- Asset valuation. This method appraises the value of a company’s assets as the sum of all fixed assets and equipment, improvements to the physical plant, inventory and owner benefit. This method is most often used in asset-heavy industries such as retail and manufacturing.
- Market valuation. This method uses industry-average sales figures as a multiplier, but doesn’t account for variations in the particular business. Internet businesses are often appraised with this method.
- Capitalization of income: This method considers only cash flow and return on investment (ROI), taking into account important intangibles such as work force and management, turn rates, industry trends, sales projections, and the market position and maturity of the business. This method gives buyers an estimated time frame in which the new owner might expect to recoup his investment.
- Owner benefit valuation: Most often used for businesses whose primary value comes from their ability to generate cash flow, this formula multiplies the owner benefit by 2.2727 to arrive at an estimated fair market value.
- Depending on the size of your business, industry type and the reason you need a valuation, consider consulting with a business valuation expert. An expert is especially important if you need to establish or defend your business’s value in court.
- Remember the goal — to determine the fair market value of your business, which is not simply a sum total of the money and energy you have invested in it. Fair market value reflects how much a reasonably informed buyer would pay.
A final tip is to give yourself plenty of time to arrive at a value if you are considering selling your business. It is better to take a little extra time now to determine fair market value than to sell your business quickly and learn later that you could have sold it for a lot more.
Buying or selling a business is an important event for business owners and investors. For more information about doing business in Pennsylvania, seek the help of a professional business law attorney. The attorneys at the Scolieri Law Group, P.C. can advise you regarding existing laws and regulations and help you develop a strategy to meet your business goals. Contact us today at (412)765-0546 or firstname.lastname@example.org.