Small Business Valuation Services: Top Trends

 

So, how much is your business worth?

If you're still unsure, you're not alone. Putting a fair market value on your company requires a skill set and a level of expertise that most small business owners lack.

Business valuation services require a delicate balancing of art and science. What your firm does, where it does it, and how effectively it does, as well as a variety of external variables, all play a role.

Why should your company be valued?

Most small business owners think of business valuation regarding how much money they could get if they sold their firm. However, there are additional factors to consider when assessing the value of your company.

However, now that these other situations have been revealed, the atmosphere for selling or testing the waters appears to be improving. Merger and acquisition activity always rises when the economy improves. According to a survey by a research organization that analyses private equity activity, 30% of private equity acquisitions finalized in late involved transactions worth less than $25 million, indicating that small and medium-market investments are attracting a lot of attention.

Process of Small Business Valuation:

Ultimately, your company is only worth what you can convince someone to pay for it. But how can you determine if an offer is realistic or fair?

When attempting to place a market value on your firm, you should seek the counsel of an experienced business analyst, but here's an outline of the valuation methods you'll most likely encounter.

The Earnings Multiplier Method of Valuation:

In an ideal world, you could compare the prices of similar, publicly held organizations that were previously sold under similar conditions to establish a price for your company. To arrive at a price, you might compute an average price ratio for previous deals and apply it to your company's pre-tax earnings.

For example, suppose organizations in your industry have sold at 4.5 times earnings in previous deals, and your company produces $900,000 in revenue. In that case, a rough purchase estimate may be slightly north of $4 million.

The difficulty with this technique is that public company PE ratios may not necessarily provide a fair comparison to smaller, privately owned firms. This isn't to say that using an earnings multiplier isn't a good idea – it is in many small business valuation circumstances – but modifications must be made.

There are two issues here:

1.     What earnings are taken into account in the calculation?

What about last year's? Is it an average of the previous three years? Is this a forecast of the standard for the next five years? Again, if you're valuing your business for a potential sale, keep in mind that the buyer is buying the future, not the past. As a result, a strong case may be made that predicted future earnings – generally pre-tax earnings – should be used as the foundation for computation.

2.     What exactly is the multiplier?

That is, what is the result of multiplying the projected profits by a number? For example, what are the numbers two, five, and ten? This multiplier will vary by industry, perceived risk in purchasing and running the firm, the overall health of the economy, and how much the buying party wants the company in a selling situation.

The process of business valuation services is quite complicated. However, this data demonstrates a straightforward way of estimating the value of a firm.

Every scenario is unique, and hundreds of elements that aren't discussed here have an impact.

The most important thing to remember is that the earnings multiplier technique of valuing looks to be here to stay for established small firms. If you're planning the business valuation services, consult with Spring Galaxy's accountant or financial adviser to ensure you understand the concepts and how they apply to your circumstances.