Accurately Valuing Small Businesses for Market Success

Any person buying or selling a business must know its worth before proceeding. However, people often focus solely on the asking price without considering other factors. What must they learn to assess a small business accurately?

Valuing a Business

A business valuation determines a company’s economic value. It tells a person how much a company is worth based on financials, market conditions, and potential growth. A person may value a business before buying or selling it. They may need to do so to raise capital or when planning a merger or acquisition. A business owner might request a valuation to make informed decisions about the future. Regardless of why it is being done, the valuation process is similar. 

Factors that Affect Business Value

Several factors influence business value. Revenue and profit play a role in valuation, and the company’s growth potential must be known. Industry and market conditions can also affect business value, and the owner must consider their customer base when calculating this value. What market share does the business currently have, and what is the competitive landscape? The overall market plays a role in how much a company is worth.

Business Valuation Methods

Several methods may be used to value a business. The person might use the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) method if they have a substantial profit margin. However, if the company has limited profitability but excellent growth potential, it may use the Revenue Multiple method. People who want to know the company’s future cash flows turn to the Discounted Cash Flow (DCF) method. Another option is the Asset-Based Valuation method. If a company has significant tangible assets, they might use this method. 

Business Type

The type of business also impacts which valuation method should be used. Brick-and-mortar businesses often use the Asset-Based or EBITDA valuation methods. An eCommerce business, in contrast, may benefit from using the Revenue Multiple method. SaaS and subscription businesses also often use this method.

Metrics Used in Business Valuation

Several metrics may be used to value a business. Revenue plays a role in the valuation, but the person must also look at profit. Growth trends and customer retention are factors in a business’s value, and the customer lifetime value (CLTV) should never be overlooked. The person must know which metrics to prioritize during the process. 

Valuing the Business

Valuing the business takes time. Financials must be gathered, and key metrics analyzed. The person conducting due diligence must choose and apply the valuation method, watching for red flags, such as declining revenue or hidden liabilities. High customer concentration is another thing to watch for when valuing a business. A business may be overvalued when the valuation multiple appears excessive for the company’s performance or industry. 

The valuation process takes time. The size of the business and its complexity influence the time needed to complete the process. The method used also affects the time necessary to complete the process. It could take a few days to months based on these factors. 

Valuing a business isn’t a task the average person can do properly. They turn to a professional for help with this task to ensure the value is determined correctly. Doing so provides them with peace of mind because they know the accurate value of the company and can make decisions with this information in hand.