The valuation of a small business refers to the process of determining the fair market value of the business, which is the price that a willing buyer would pay for it. This figure is determined by a number of factors. Even if you don’t intend on selling your business, as a small business owner, you’ll need a valuation for tax and estate planning purposes.
Common Calculation Methods
The Earnings Multiplier Method
This method is the most commonly used and takes into account the business’s earnings, growth potential, and risk.
To calculate the valuation using the earnings multiplier method, you’ll need to determine the business’s earnings before interest and taxes (EBIT). This figure can be found on the business’s financial statements.
You’ll then need to multiply this by a factor that takes into account the growth potential and risk of the business. This factor is determined by looking at similar businesses that have been recently sold. The growth potential of the business is taken into account by looking at the historical growth rate of the business and the industry. The risk is determined by looking at the stability of the industry and the business’s financial position.
Once you have determined the factor, you’ll need to multiply it by the EBIT to get the valuation of the business.
The Market Approach
This method looks at the prices that similar businesses have recently sold to determine the valuation of the business.
To calculate the valuation using the market approach, you’ll need to find comparable businesses that have been recently sold. This information can be found in business broker databases or online business-for-sale listings. Once you’ve found appropriate comparisons, you’ll need to adjust the prices to account for any differences in size, location, or industry.
You’ll then need to take the average of these prices to get the valuation of the business.
The Asset Approach
This method looks at the value of the business’ assets to determine its valuation.
To calculate the valuation using the asset approach, you’ll need to find the value of the business’s assets, which can be found on the business’s balance sheet. You’ll then need to subtract the value of the liabilities to get the valuation of the business.
Why Use an Accountant for Business Valuation?
While you can value your business yourself, it’s best to use an accountant or other business valuation experts. They will have the experience and knowledge to value your business properly. They will also be able to help you navigate the tax implications of selling your business and help you structure the sale to minimize the taxes you’ll owe.