When people approach small business valuation process, many are surprised, if not shocked to learn that the valuation of a business is very much determined by the reason for needing it to be done. With so much of business being just the facts and figures, many people do not realize how the worth of the company can be influenced this way. That is one of the reasons for the different kinds of valuation services and business valuation resources that are out there. Here are some tips to getting the right business valuation for your company.
1. Pick the right valuation method.
There are a few ways that companies determine their worth and each requires using different business valuation resources to accomplish the analysis.
The market multiple method looks at the sales of similar companies. In this method, the value of a business is measured by looking at how a similar company in the industry sold for and comparing that to the business whose valuation is being sought. If you see that a company that is in your industry and is very similar to yours but it five times as large and sells for $10 million, you can extrapolate from that information that your business might be worth about $2 million.
A comparable method is to look at the revenue of another company that is similar to yours. If a business that is similar to yours is generating $100,000 in revenue but is trading or selling at about $500,000, you take your revenue and multiple it by five.
The next method is referred to as the “cost to recreate” system. If everything were to vanish right now, how much would it is cost you to remake everything exactly as it is? Some of this is easy to calculate. The business space, equipment and materials all came with a price tag that can be checked. The cost of your marketing plans and to hire staff may be more challenging to calculate. This is the best way to approach a small business valuation for a start up company. There may not be anything similar to it and it may not have begun to bring in revenue.
Look at your cash flow. The last method looks at the cash flow of the business. In this method, companies look at their revenue and cash flow now, look to their forecasts for future revenue and cash flow and complete the business valuation appraisal based on that data.
2. Consider factors that are are harder to measure.
There are a lot of small business valuation resources such as business valuation software that can be used to measure a number of things about a business but there are some that are harder to measure. When you are working on your business valuation, there are some intangibles that you need to factor into your appraisal. The experience level of your team will have a direct impact on your bottom line but is not something you can easily measure. Entrepreneurs with a strong track record will be able to command a higher small business valuation result.
Another factor is the future of your industry. When companies like Netflix or Facebook started, it was hard to use conventional business valuation resources to determine their worth because the markets for those products was new.
While it may be impossible to have a line item on a balance sheet for these intangibles, it is important to factor them in when you are conducting a business valuation process.
3. Keep your emotions at home.
This may seem like an impossible thing to do for many entrepreneurs but it is necessary for the completion of an accurate and helpful business valuation process. When you are talking about a company into which you have poured your blood, sweat and tears, it can be hard to separate your personal feelings on the matter. It is essential that you be able to look more objectively at your creation and where it can realistically be expected to go.
When you start the business valuation process you have to know why you are doing it. Are you selling? Are you looking for investors? The answer will have an impact on your final business valuation.