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Do you know how much your small business is worth? Do you know how much someone might pay for your small business? Many small business owners think they know the value of their business, but find out they didn’t know all the nuances that go into business valuation.
This is something that makes speaking with a business broker the right move sooner rather than later. However, there are some things you can do to find a rough valuation for your small business before putting it on the market. Here are a few things to help you determine the value of your small business.
Avoid Going Too High or Too Low by Consulting Professionals
Many small business owners may set a price based on their own criteria, but without understanding selling a business, they risk setting the price too high or too low. A low price can lead to wariness from potential buyers because they may believe the business hides a dirty secret or inadequacy that isn’t apparent.
A low price may also attract people or groups that you may not feel comfortable selling your business to. Setting too high of a price will keep potential buyers away, especially those prospects who already did the math and have a valuation in mind based on a more industry-standard approach.
For these and other reasons, you need to undergo a proper valuation process before setting your price. A business broker or other investment professional can help you figure out the best valuation for your small business.
These professionals will know the market, the going rates, the local nuances, and various other things that can factor into the price they will suggest for you. Even if you don’t take on the full services of a business broker, you should at least seek one for an appraisal.
Set Your Price Before Marketing, Promotion, Or Even Talking About Selling
Don’t set a price, then change it later when you learn the one you set wasn’t the right one. You need to start with a good valuation from the start. Remember that the valuation isn’t about the price you want, it’s about the price your business will fetch.
Changing prices in the middle of marketing or promoting your small business can turn off potential buyers. Some may feel they can’t trust you or the business. Others may feel you’re trying to manipulate them into making certain offers. Valuation should happen early and it should happen accurately. Set your price, make sure it’s the right price, and go from there.
Understand Some of the Different Valuation Methods
Several business valuation methods exist, and understanding some of the more common ones can help you to understand the pricing range you should consider for your small business. Once again, valuation should occur with the help of an expert business broker or other investment professional.
Some business valuation methods work better for some types of businesses than others. Equally, people and groups will use different valuation methods based on their own intentions for the business. For example, the valuation methods favored by investors aren’t the same as the valuation methods used by a group that may want to keep a small business in operation.
A seller will use one valuation method while a buyer will use another. Business brokers know and understand all this, and will factor these facts into their own valuation suggestions for your small business. Some of the more common business valuation methods include:
- Market valuation
- Discounted cash flow analysis (DCF)
- Asset-based valuation
- ROI-based valuation
- Capitalization of earnings and multiples of earnings valuation
- Book value or liquidation valuation
- Real options analysis
- Historical earnings valuation
- Future maintainable earnings valuation
Yes, the list (PDF) really goes on and on. A small business owner doesn’t particularly need to know all the ins, outs, and formulas for business valuation. That’s what your broker is for. You can still get by with some online business valuation calculators.
A good place to start is with an income, market, and assets approach. Still, there’s no substitute for receiving an expert valuation from someone with the education, experience, and the actual occupation designed to help you find the best valuation for your small business prior to selling it.