There are two main approaches to valuing your very small business, asset valuation and multiplier approach.
Asset Valuation for Small Businesses
With an asset valuation, the value of the business is derived from the value of the assets. Assets are all of the things that the business uses as part of its operations. Assets are both tangible and intangible – equipment, electronics, furniture, trademarks, brand name, goodwill, etc. To create an asset valuation, a seller starts by making a list of all the things that the business needs to operate. Then, the seller assigns a value to each asset.
Multiplier Valuation for Small Businesses
The multiplier approach uses a multiple of the seller’s discretionary earnings (SDE) to determine value. SDE is how much money the seller makes after he/she pays his expenses. The multiple is determined by market factors, and, for a very small business, the multiple is usually between 2 and 3.5. This means that if a seller is making $50,000 per year after expenses, the business would be valued anywhere from $100,000 to $175,000.
Decide on an Approach
Deciding which valuation method is best for your business depends on many factors. Often, bigger VSBs will use a multiple approach. Smaller VSBs are more likely to use an asset valuation.
Maximizing the proceeds from your sales starts by having the correct valuation. When it comes time to attract buyers for your sale, you’ll want to price your business at a number that resonates with the market. Book a discovery call with us to learn more about valuation and get started on the process of selling your business.
