The answer depends on many factors, including the valuation method and the purpose of the valuation. There are several ways to determine business value. The simplest is balancing assets against liabilities. Projected future sales is another. No matter the method, how much a business is worth matters when it comes to insuring, financing, or selling it.
Appraising Small Business Value for Financing
Whether applying for a traditional loan or seeking investors in exchange for equity to expand a small business, it is essential to determine the value of the company. Assets are straightforward: add inventory, cash on hand, and account receivables. It is also necessary to depreciate fixed assets, assess the worth of real estate or a leasehold, and appraise the intellectual property.
Expenses can be trickier, especially if there are outstanding business loans. Interest payments on loans and credit accounts can inflate debts and mean the difference between profits and losses.
Lenders and investors will want to see projections of future business as well. If the proceeds of the loan or investment are being used to upgrade equipment or development of a new marketing strategy, projections of how it will help the business are crucial. This will help determine the future value of the business.
Evaluating the Worth of a Business Prior to a Sale
Whether the business is a single website generating a profit through affiliate marketing or a retail storefront earning millions of dollars a year, establishing the value is a crucial first step before a sale. A potential buyer will want to know the financial state of the business before making an offer. Establishing that value can get complicated.
One way of establishing value is to use a multiplier of annual revenue. A website generating $3,000 a month in ad revenue, might ask for three times is annual proceeds, or $108,000, as a starting point. Traditional brick and mortar retail stores will have to make adjustments for equipment, inventory, and leasehold.
A service provider with a robust clientele may be able to assign a specific value to that client list. Non-compete agreements may increase the value to the buyer since there is assurance that the seller will not restart the business down the street.
How Much Is My Small Business Worth
Discover how much a small business is worth before applying for financing or listing it for sale. Identify the assets and liabilities.
Get in touch with McDonald Law Group today to get answers to your questions.
This information is provided for informational purposes only. It is not legal advice and does not constitute an attorney client relationship.