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20 February 2023

How to Value a Small Business: 5 Common Methodologies

As a small business owner, you may be considering selling your business, transferring ownership, or simply curious about its value. One of the most critical factors in the process is determining how much your business is worth. There are several methods to evaluate the worth of a business, each with its unique advantages and disadvantages. In this blog, we will discuss five commonly used methodologies to value small businesses.

Asset-Based Valuation

This method calculates the value of the business by subtracting its liabilities from its assets. It's typically used for businesses with significant physical assets, such as manufacturing or real estate. However, this approach may undervalue businesses with intangible assets such as intellectual property or a loyal customer base.

Earnings-Based Valuation

This method estimates the value of the business based on its historical or projected earnings. This approach is commonly used for service-based businesses, but it can be more challenging to apply to businesses that have volatile earnings.

Market-Based Valuation

This method compares the business to similar businesses in the same industry that have recently sold. This approach is commonly used for small businesses with an established market, but it can be challenging to find suitable comparable businesses.

Industry Rule of Thumb Valuation

This method estimates the value of the business based on a standard formula commonly used in the industry. It's commonly used for businesses with a niche market, but it can be challenging to determine the accuracy of the formula.

Discounted Cash Flow Valuation

This method estimates the value of the business based on its future cash flow discounted back to the present. This approach is useful for businesses that have consistent cash flows and a predictable future, but it can be challenging to predict future cash flows accurately.

While these are some of the commonly used methodologies, there are others. The best approach depends on the type of business, the industry, the economic conditions, and the purpose of the valuation. An experienced business consultant can help you determine the most appropriate method to value your business – and that’s where we come in!

The key is coming at it with an open mind; ultimately your business is worth what someone else is prepared to pay for it. Get in touch with us to see the pathway we put in place to help business owners maximise the value of their business. We believe that adding in strong financial processes and workflows, not only helps for the future, but helps for the present too.

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