Small business valuation methods
It is important to do a proper valuation of a small business if there is a need to to sell your business
- to attract investors;
- You are buying out a business from other owners;
- You want to find a business partner;
- You wish to apply for a loan;
- you want to understand the development of your project
Business valuation methods
There are different ways to value a business based on profitability, future projections, balance sheet, and the valuation of similar businesses for sale.
The choice of method depends on the size of the business and the purpose of the valuation. Each method has its pros and cons and is suitable for different situations.
Market valuation method
With this method, the value of a business is determined by comparison to similar businesses in the market. This method is suitable for established businesses.
This method is suitable for businesses that do not have much income or the company is losing money.
This method is quite simple - add up the value of your assets and subtract the liabilities. This method requires knowledge of the current value of assets on the market.
Income capitalization method
This method of valuation is suitable for stable companies whose income is stable. To calculate the value, you need to divide the cash flow for a certain period by the expected rate of return.
Discounted cash flow method
This method is suitable for companies. which will grow very much in the near future or, on the contrary, shrink.
For this method of calculating the value of a business, the projected cash flow of the company and the time value of money must be taken into account.
There are other methods for valuing start-ups and we will write about them separately.
Do a business valuation whether you are trying to find an investor or plan to sell the business. Periodic business valuation helps you monitor progress and make adjustments to your development plans in time.