What is your business worth? If you’re a passionate and involved owner, you’ll be tempted to rattle off a number right now. But the right answer will always be “it depends.” This is why small business valuation services continue to be some of the most sought-after skills on the market. How come? Because small business valuation methods vary, and deciding on the best, most informative business valuation tool for you won’t be so easy. Below are three common small business valuation methods along with some of their obvious pros an cons to help you get started thinking about what your business valuation should depend on:
Method One: Valuing the Business Based Solely on Assets
You’ll often hear people try to do this for themselves, especially in an election year. For instance, how often has Trump rattled off his “net worth” to the cameras? Judging a business’s value based solely on assets is one of the more popular small business valuation methods for a number of reasons. For one, it’s easy to count the beans and say a number. For another, this number is a concrete, tangible measure that’s easy for others to understand. The problem with valuing your business in this way is that a company’s assets don’t tell the whole story. Specifically, they don’t talk about a company’s liabilities. For example, it’s all well and good if your beachfront rental property “is worth 2 million a year,” but not if you have a 5 million dollar debt hanging over your head.
Method Two: Valuing the Business Based on the Balance of Earning Power and Liability Assessment
If you’ve ever been near an accountant, then chances are you’ve heard the phrase “assets versus liabilities.” The liabilities part gets to the stuff we were talking about in the cons of method one. Considering a business’s risks along with their ability to generate revenue is good for a number of reasons. For one, it provides a more nuanced picture of the firm’s financial situation. For another, it gives hints as to whether a business will be viable in the long term as well as the short term. For this reason, we recommend method two as one of the better small business valuation methods.
Method Three: Valuing the Business Based on Peer Performance
Remember how your mom told you in middle school when the kids made fun of you that it wasn’t productive to compare yourself to others? Well, in the real world, people compare themselves to others all the time, and sometimes, it courts investors. Let’s say you own a car wash. One way to maybe do a valuation on your car wash is compare it’s profits to other car washes in the area. This is a good way to value your business because it gives you concrete, locally based information about how your firm is competing. It’s less useful however when other firms’ financial information isn’t readily available. If you’re competing against private firms with no requirement to disclose, getting the comparison information may prove difficult.
Remember…
No matter which method you choose, you’ll have a better chance of accuracy and success if you’ve kept good records. So before you start any valuation, make sure you have and understand at least three years of historic income statements and balance sheets on your business. Then get to work, or find someone qualified who will!