Selling, buying, or increasing a small business’s status will all require a valuation of the property. The quicker the small business is valued, the quicker you’ll know its fair market value.
There are many ways to quickly value a small business. Below are some of your options:
Adjusted Net Cash Flow
Knowing the small business’s net cash flow will be helpful for the business owners. This method is used to know the fair asking price for the small business. This will be based on the business’s annual profits and loss in the recent years. Through these data, the earning power of the small business will be determined, thus demonstrating the real potential of the business as a good investment.
The earning power will need to be multiplied depending on the business’s category, which can be manufacturing, retail, or service. Brokers know more about this thing so it is important you closely work with a professional when determining the small business’s value.
Rules of Thumb
This can be your quickest way to determine the value of a small business. Using the general industry-accepted rules of thumb will help you estimate the business’s value. Still, you’ll need data like the recent annual sales of the business to do this.
Auto repair shops, for instance, are priced 35% of their annual revenue while fast food stores are 40% their annual revenues. Motels, hotels, and similar businesses are priced per room. This way, you can get the estimated value of a business quickly. But take note, it’s for estimation only, not for formal valuation, which will entail extra effort and time.
With your Internet access or at least access to small business listings, it will be easier for you to know how other small businesses similar to yours are priced in the market. This way, you don’t have to do the tedious task of collecting data or doing the difficult math. Simply assess at least three businesses that are similar to what you have and set the price for your small business.
Besides, you will be competing with these small businesses so your price must be competitive.
This technique will depend upon the business’s assets to determine its market value. Business assets include things from paperclips to land and buildings. This can be easy math because all you have to do is add up the value of these assets. However, this technique does not include other non-material business assets like growth potential, client base, and goodwill.
The techniques discussed here will give you the value of a small business in the quickest possible way. Keep in mind that doing it the right and accurate way is far way better. If you can’t do the more complicated way, then better hire a business broker. He can help you determine the business’s value and finally sell it at a very good asking price. If you are planning to buy, a broker is also helpful in determining the best price possible for you.
Negotiations will still occur so don’t expect to get the value determined by the valuation. What’s important is that you meet at a price that both the seller and buyer is happy about.