You’ve spent years starting and growing your business into a success, but after a few years, you may be left wondering what’s next and if it’s time to sell your business. Before you can, you’ll need to answer, how much is my business worth? This guide can help point you in the right direction when valuing your business.
How to value your business
Your business’s value is determined by its worth to someone else. Before calculating its valuation, it’s important to understand the ways that a business can be valuable:
- Earns money: If your business makes profits, the opportunity to receive those profits is valuable to a buyer.
- Improves an existing business: If buying your business benefits another business that a potential buyer owns, it’s valuable to them.
- Resell price: If your business can be bought and then sold later at a higher price, it is valuable.
Buyers need to know whether the business is worth anything without you to decide its value. If the business still depends on your involvement in customer service or making the products and services it sells, this can hurt its value. Valuable businesses tend to have systems to operate without the owner involved and can continue once you depart.
What are the small business valuation methods?
It’s important to know that your business valuation is not a formula for calculating exactly what your business is worth – it’s just a starting point. Ultimately, your business will be worth the amount someone is willing to pay and what you’re willing to accept. It’s a negotiation that goes beyond formulas. However, these valuation methods can guide you on getting a fair price, the most you could ask for, and the least you should accept.
Method 1: What you take home
The most common way small businesses get valued is by Seller’s Discretionary Earnings. This means figuring out what the business is worth based on what you take home from the business. Buyers can hire a professional to review your business and see:
- The salary you take from the business, if any.
- The transfers you take from the business, like your draws or distributions.
- The personal expenses you charge to the business.
There can be more to it, but ultimately, professionals will add these up and multiply the result using a “multiple” to calculate the business’s value. This multiple is based upon the size of your business, the industry, knowledge of the market, and other factors. For smaller businesses, your multiple can come from valuation databases like BizBuySell, International Business Brokers Association (IBBA), and M&A Source.
This method is most commonly used for very small businesses because it puts the focus on what you take out of the business, and pays less attention to your financial statements, as many small businesses may not have accurate financial statements.
Method 2: What other similar businesses are worth
Like the first method, this approach uses multiples, but it goes beyond the money you take home to determine the business’s value.
At the simplest level, this can include:
- Your profitability: Valuations done by profitability or earnings before interest, taxes, depreciation, and amortization (EBITDA) are common for medium-sized and larger businesses, and there are many databases of valuation metrics. This is usually considered in larger deals as it requires a more in-depth analysis of your financial statements.
- Your revenue: Small and medium-sized businesses can be valued based on a multiple of revenue. This method is more favorable for businesses with less-formal financial statements, because it focuses primarily on sales.
In more complex cases, it can include:
- Your contracts: The number and size of contracts you have.
- Sales volume: The number of products or services you sell per month.
- Geographies: The number of territories you sell in.
- Online presence: The size of your online community.
How can you plan ahead?
When talking about how much your business is worth, the focus is often on what the business will be worth, not necessarily what it’s worth now. This is where planning comes in:
- First, you can use these business valuation tools to establish realistic goals for what you want your business to be sold for in three, five, or ten years.
- Then, you can determine what benchmarks you’ll need to reach regarding revenue, profitability, or other success metrics to achieve your sale price.
- Finally, you’ll create plans to grow the business to that level. This type of exercise changes thinking within a business and can help you make more focused decisions daily with these specific goals in mind.
Where can you find professional support?
These are just a few of the many methods to value a business. If you want to sell your business, it’s a good idea to get professional help. Advisors can more accurately develop a range of values for your business, target the right business or individual to buy it, and guide you through marketing and selling your business.
Advisors can include a business broker or your CPA, and for larger businesses, financial consultants and M&A firms. You’ll want to check if they have any certifications for valuations and, in some cases, whether they hold the appropriate securities licenses from the U.S. Securities and Exchange Commission (SEC).
Pursuit can help
Pursuit is a leading small business lender serving small businesses across New York, New Jersey, Pennsylvania, Connecticut, Nevada, Illinois, and Washington. We provide more than 15 loan options, business advisory services, and insightful resources.
We’ve helped thousands of small business owners get the funding they need to achieve their goals and dreams, and we can help you, too.
Apply now so we can help your business reach higher and grow!
