U.S. Small Business Administration
How Much is My Business Worth?
By JamieD Published: March 24, 2010 Updated: February 16, 2011
Placing a value on your business’s worth can be a difficult task with no clear path to an accurate answer. To be fair, there really isn’t one “right” way to value your business; however, there are probably several “wrong” ways that could get you into trouble. It is prudent to seek professional advice when trying to determine the best valuation method for your business, but even before you speak to an expert, you should have a good understanding of what can be a very complex topic. Here is a brief overview of common business valuation methods:
Evaluate Your Assets
One way to evaluate your business’s worth is to examine its assets. Think about everything you own, what equipment you’ve purchased, and any other assets that make your business possible. All these items increase the value of your business. Even though they don’t come in the form of paper bills, any new business would have to spend money to acquire these assets and therefore they are worth a great deal. Going over your business’s books and balance sheets should give you a good idea of what you own and what it’s worth. Take the value of your assets and subtract your business liabilities to determine a raw estimate of your net worth.
TIP- Estimating your business’s value should serve as another reminder that keeping good records serves many purposes in running a successful business.
Revenue in Multiples
Another popular valuation method is based on a business’s revenue. Many businesses are valued by multiplying their revenue. Revenue * x = Business Value
Confusion often surrounds the actual equation because the multiple (x) is not the same for each business.
Many industries evaluate their businesses differently and therefore one may claim that a business is worth two times its revenue while another may claim it’s only worth one. It’s important to know your industry’s standard before trying to use this method. Don’t assume you know what you’re dealing with because just one number off can create extremely different values.
TIP – In determining the right formula for your business, it would probably be beneficial to contact a local expert in the area. Stock brokers, business managers, and small business experts are all appropriate sources to assist you with these issues.
Go for the Earnings
An argument can be made that it’s more important to estimate value based on business earnings rather than just revenue. It’s possible to continue producing a high annual revenue without turning a profit. Over time, this can be draining and put an intangible strain on your business’s value. Therefore, another valuation approach would be to evaluate annual profit. One way to look forward is by looking back over the years to follow the record of your annual profits. Patterns are a good way to show that you’ve been able to produce a certain profit margin over a certain period of time. However, it is important to take into account “unknowns”. Unpredictable events like increased competition, decreased demand, or a dip in the overall economy will all have an effect on your annual profit. Many businesses use a formula, similar to the multiples of revenue, to estimate business value based on profit. The long-term Treasury bill interest rate is often used to compensate for outside factors and the “unknowns”. A vague estimate can be formed by dividing your current annual profit by the long-term treasury bill interest rate. Exact formulas vary and this should only be used guideline or jumping-off point.
TIP- Remember the intangibles.
Each of these methods places emphasis on assets and cash. It’s important to take into account that value is often influenced by personal concerns and priorities. If Barbara wants to buy a restaurant on the street she grew up on, and you happen to be selling a restaurant in that exact location, your business’s value would be much higher to Barbara than to Liz, who simply wants to buy a restaurant somewhere in town within the next few months. While this is just a simple example of how the same business can be valued differently to different people, don’t underestimate non-financial concerns. In some situations, these intangible assets can end up being just as important to your business’s value as its monetary worth.
U.S. Small Business Administration
Published: March 24, 2010 Updated: February 16, 2011