Many people see starting a new business as the quintessential American thing to do. That is one reason so many new businesses open their doors every day and every month. An estimated 543,000 new businesses open each and every month in the United States. If you own your own business, at some point you probably will need to apply some small business valuation formula to it. You will need to use objective and speculative data to determine your small business valuation.
The first thing you need to do is determine why you are conducting a small business valuation analysis. It may surprise you to know that the reasons for needing this done do have a very real impact on the results of your evaluation. This is because no small business valuations are absolute. The process looks at your business’s worth but that is also not absolute. The final determination of your business worth is based on what you use to measure that value and the circumstances under which you are calculating it.
The next thing you need to do is determine the right business valuation approach for your company. The three basic approaches are the asset based approach, income based approach and the market based approach. Each has benefits and downsides and your reason for needing a small business valuation formula to be applied to your company will determine which is the right approach to use.
- The Asset Based Approach: If you had to start over from scratch and get all new equipment, staff and any other asset (business space, etc.) you have, how much would that cost? This can be one of the simplest small business valuation formula to get the value of your business. If your business is fairly new, you can even see what you paid for everyhing and use some of those numbers. A harder number to nail down is how much it would cost to hire new staff. That is an expensive and labor intensive process.
- The Income Approach: Take both your business’s earnings before and after taxes. Another way to get to this valuation is to look at your firm’s gross sales or some other similar metric. Take this number and add to it the worth of all of your company’s tangible assets. Next determine your firm’s intangible worth. This takes into account your earning potential and possible future growth. This may seem like a more complicated small business valuation formula but can be most helpful when you are trying to sell your business plan and idea to potential investors who want to see where your firm is today and where you expect it to be tomorrow.
- The Market Approach: This is an easy to understand small business valuation formula especially for people who already own residential real estate. When people want to see how much their homes are worth, they will look to the market and see how similar homes in their area sold for. When you are looking to sell your business, this approach can be very helpful. Look for similar companies in your region that have been sold recently. If you can find two or three (four is even better), you can get a sense for how much your business is worth. The only drawback is that unlike residential real estate where there may be a market for several two bedroom homes, there might not be the same market for four smoothie businesses, for example.
Try to keep your emotions at home. Any small business owner will tell you that their heart is wrapped up in their business venture. It makes a lot of sense. People put a lot of their heart and soul into their companies and really want them to do well. This is why many people turn to small business valuation service companies to do this for them. Outside companies often have the distance and objectivity that is needed when applying a small business valuation formula.
Getting the right small business valuation analysis can seen challenging and maybe even a little painful but it does not have to be. While you need to be objective, you can still showcase your strengths and growth potential.
