Valuation Methods for Small Businesses


Knowing your company’s bottom line is one thing, but how much your business is worth is a different story. You may need to know about your overall finances when gearing up for a new business plan, seeking new investors or thinking about cashing in and exiting your business. Business valuation factors in everything from the current state of the economy to your balance sheet when determining how much your business is worth. Depending on the kind of business you own, there can be a variety of methods to help you picture your overall value.

Market approach

Restaurants, pet services, tourism – these kinds of businesses are quite popular in terms of number and earnings. In this case, it’s possible to compare financials against those of similar businesses. The market approach reveals the value of your business by using market statistics as a pricing guide. This is the most common approach to take, as market value is also the basis for most business acquisitions.

Aside from pricing the business for an actual sale, using the market approach also gives you enough information to ascertain business value in the middle of ownership and tax disputes.

Income capitalisation approach

This approach stems from the idea that a business’s true value lies in its ability to generate future wealth. A method such as Capitalised Future Maintainable Earnings would determine your expected level of cash flow based on previous records. Businesses that have a stable income and an upward earning trajectory will find this method to be most suited for them.

If your business is new and relatively uncommon, you may require a method that relies on the premise of anticipated income. Companies that have yet to establish a solid customer base and sustainable profits can focus on cash flow stream, long-term business value and business risk captured by discount rate in the Discounted Cash Flow method.

Asset-based approach

Thriving businesses usually opt for using the methods above, but those heading towards liquidation will find this straightforward approach more useful. Totaling up a business’s assets puts the company’s earning potential out of the picture while factoring in both tangible and economic values of its assets.

How accurate are these approaches?

Even with well-documented finances, each valuation method can prove to be unreliable when used in situations that are less than appropriate. This is the reason why different approaches exist for businesses at different stages of growth and strategy. Overall, it would be necessary for an accountant or an outside professional to take your business through the valuation process in order to minimise error and bias.

It’s possible for you to be surprised if your business’s estimated value is lower than expected. Instead of focusing on perceived value, keep track of profitability and positive cash flow to improve your business’s overall wealth.

Valuing business starts with having the bigger picture in mind. That is why myCEO focuses on virtual CFO services beyond accounting and financial advice. Take our TRUST assessment to find out which aspects of your business can benefit from our expert approach.

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Topics: Finance

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