Home Business Small Business Valuation – 3 Ways to Estimate Your Business’ Worth

Small Business Valuation – 3 Ways to Estimate Your Business’ Worth

by gbaf mag

Small business valuation is important if you want to know what your small business is worth. Small business valuation can be complicated. There are several ways you can do it and they all have their own advantages and disadvantages. The best way for you to do a small business valuation is to talk with a certified public accountant. Let’s take a look at these different ways.

Method one: Cash-flow Valuation uses your business’ assets and liabilities as if they were liquidated. You calculate the value of the entire business by calculating the difference in liabilities and assets. When you use the cash-flow method, you basically look at your company as being composed of many smaller components. The parts are much smaller than you may think and can make a big difference when it comes to the valuation. This is why many people feel that this is the best way to determine the value of a small business.

If you decide to use a professional appraiser to do your small business valuation, make sure that you go through a couple of things with the appraiser. First, you need to make sure that the appraiser is not going to cost you any money. A good independent appraiser should not cost you any money. Make sure that the appraiser has a certificate of clearance from the National Association of Appraisers and that the appraiser has a good standing with the Better Business Bureau.

Method two: Income Statement If you choose to use the sde method of valuation, your income statement is going to be used. Your income statement will show all of your income streams and it will break them down into your cash flow. The cash flow will help you determine the potential of the business. Here is where many people mess up. They include their fixed assets, operating fixed assets, goodwill and other intangible assets in their income statement. All of these will affect the valuation of your small business.

Valuing the liabilities is much more difficult. For instance, many companies get confused by the different types of liabilities that they have. The tax laws concerning liabilities make it very hard to put a value on the liabilities of a company. Also, many buyers of a company will exclude some of the company’s debts or other financial statements from the valuation because the company has no control over those debts.

There are three popular methods of valuation used by financial professionals to determine the value of small businesses. The first method is called the costing approach. This is the most commonly used method and is the standard for the United States as well as many other countries around the world. This method includes two different sets of calculations. The first set of calculations is based on future cash flows and the second set of calculations is based on the present-day cash flows of the company.

The second method of valuation is called the income method. With this method, there is no allowance made for the present day cash flows of a company. This makes the method a little more difficult than the first method of valuation. If you decide to use this method of valuation, then you will want an experienced professional appraiser who is familiar with what is needed to be determined as to what the company’s worth is. Because the process can be complicated, it may be a good idea to have a consultant to help you with determining the worth of your company.

The third method of small business valuation is called the sale-and-forget method. This is used in cases where there are substantial debts on a business. You can either choose to have the debts reviewed by an expert in business valuations or you can hire a certified public accountant to do the review. It is important to have your debts reviewed by an expert because they may provide a better picture of what your company is worth when compared to its market price at the time of the sale. In cases where there are few assets to be reviewed, then you will not need a certified public accountant to do the review. However, if there are significant assets to be reviewed, then you should hire a CPA to do the review.


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