Hina Sohail

Heads up in the clouds

Knowing how to value a small business might be a steep task. Right from raising funds or applying for a loan, the small business must be valued right. Feeling confident in assessing a small business is the sole key. Let us take a leap ahead and know the fundamental ways which can help you to value small business.

1. Know your Valuation

Unless you are a talented businessman or an experienced one, business valuation is not a natural process. You need to understand the following things before you step into it.

  • Seller Discretionary Earnings (SDE)

The businessmen calculate SDE after which they get to know the value of their business. The SDE will compose of income report, non-cash expenses and the revenue business is generating.

In simple terms, higher is the SDE, greater will be your business value.

2. Value the Business Assets

A stable small company which has got a consistent cash income often has substantial assets. Some of the best examples of such businesses are manufacturing along with the property.

To perform an asset evaluation, you need to understand the NBV (Net Book Value) of your business. These will give the actual figure which represents the worth of your business.

3. Perform the Recurring Revenue Multiple Method

A company which has got recurring incomes needs a different method for valuation. The basic formula to calculate the worth of a recurring revenue business is as follows:

Sale value= recurring revenue x Industry Multiple

4. Cash Flow in Discounted Form

This is probably one of the most elaborate ways to value your small business. It defines the assumptions and calculates your business value.

In this method, the future cash worth is estimated by comparing with the existing cash flows. Either, you can calculate today’s revenue using the discount rate.

On an average scale, the discount rate falls between 15 to 25 percent depending on the type of businesses.

5. Value your company based on immeasurable

A business is only worth after someone is ready to pay for it. In this case, the intangible assets play an essential role.

If the business is working as per customer’s expectations, definitely the business value will be on the higher side. When the industry does not have a good team behind decision making, business value can go down within time.

Depending on the worth of the others, it may vary accordingly.

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