A Guide to Valuing Your Small Business Before Selling It

Valuing your small business is an important part of the sale process. It’s not uncommon for owners and potential buyers to disagree about the value of a company. In this article, we’ll explain how you can use different approaches to value your company before it sells—and why those approaches matter.

The Valuation Process

The process of valuing a small business is different for each company. You may need a company valuator to do the work for you. It starts with the preparation of financial statements, which are used to determine the value of your company’s assets (such as inventory and equipment) and liabilities (such as loans). The next step is to establish what you feel is your business’s true value based on market research, industry trends, and other sources. Next, you’ll want to make sure that all of your books are current and accurate before getting started on this process. 

The Price-Earnings Multiple

The price-earnings multiple is a ratio that measures the market value of a company’s shares to its earnings per share. It is one of the most common methods used to value public companies, and it has a long history in finance. The idea behind using it as a business valuation tool is that you know how much investors are willing to pay for each dollar of earnings at current stock prices. This is important to know, as stock prices are liable to change and therefore the value of your business is liable to change too. You can use this information to estimate how much your business would sell for if you put up your business for sale in Calgary or in any other city today.

Contingent on Earnings

The value of a company will be contingent on future earnings. This means that you need to consider how much the company can grow over the next few years and how much profit you can expect from those increases. Of course, this is all relative to other companies in your industry and what they are making right now. The more likely it is that your business will experience significant growth within three years, the more valuable it will be as a result.

Pro forma Earnings

Pro forma earnings are an estimate of what the company’s earnings will be if it is sold. It’s based on financial projections and reflects the terms you would like to see in the sale contract. Pro forma earnings can help you determine a fair price for your business, but it won’t be accurate unless your assumptions are correct.

The pro forma method is more accurate than using market multiple methods because it’s based on actual income and expenses rather than comparable companies’ revenues or EBITDA multiples (earnings before interest tax depreciation).

The Market Multiple Approach

The market multiple approach is the most popular method of determining a company’s value. It involves taking the earnings, cash flow, and book value of your business and multiplying it by a percentage that represents how much investors are willing to pay in today’s market for companies with similar characteristics. The resulting number is known as a company’s valuation or enterprise value. A good valuation calculator can help you with this and, of course, with people with vast knowledge of this approach.

The market’s multiple approaches have their pitfalls, though. If you decide to sell immediately after you increase your sales, profits will be high but won’t continue at this rate forever due to competitive pressures from other firms in your industry or increased costs for materials or labor. Market conditions can also change over time, so if you wait too long before selling your business, then there may have been fluctuations that affect its potential sale price later on down the road (e.,g., recessions).

The Discounted Cash Flow Method

The discounted cash flow method is used to value companies that are expected to grow. This method is based on the concept that a dollar today is worth more than a dollar in the future, which means that you can invest an amount today and earn interest on it until it’s time for you to use it. When estimating the value of your business, it is essential to understand how this principle applies to your company and how much value investors expect from investments in general.

Liquidation Method

The liquidation method is the most straightforward valuation method to use. The value of your business is the sum of its assets minus its liabilities. Assets include tangible assets like inventory and equipment and intangible assets such as goodwill and customer lists. Liabilities are outstanding debts, loans, and any other financial obligations that may be due in the future. The net value is what you get to keep after paying off your debtors; this is what you can sell your business for using this approach.

If you need to liquidate your business assets, you could go the route of a Manufacturing Equipment Auction. This can help recoup some of the money lost in an orderly fashion, the easiest way.

Conclusion

The process of valuing your small business is a very important one. It’s not only about getting the best price but also making sure you clearly understand what that means for you and your company. If it feels like this process is too complicated for you or if you think it might be time to sell your company, we recommend contacting one of our experienced professionals who can help guide you through this process.

About the Author

Patrick Watt is a content writer, writing in several areas, primarily in business growth, value creation, M&A, and finance. Other interests also include content marketing and self-development. Say hi to Patrick on Twitter @patrickwattpat.