8 Simple Steps to Valuing Your Small Business

December 2022

Starting and managing a small business can be an exciting yet overwhelming endeavor. With the right strategies, you can value your small business to help make informed decisions about its operations. Whether you want to sell your business or optimize it for efficiency, valuation can tell you the direction you should proceed.

This article will outline eight simple steps to determine your small business's value accurately. Through these steps, you will better understand how to identify your company's strengths and weaknesses and its market position. This information, when used wisely, will enable you to measure, adjust, and scale your success accordingly.

Let's dive into the topic!

Step 1: Research the Market

Valuing your company requires significant research and thought. Accurately assessing the value of your business will provide you with a baseline to use when making important decisions, such as selling or investing in your company's future.

The first step in valuation is having a thorough understanding of the market.

In this case, it's St. Louis.

Begin by examining how similar businesses to yours have been valued in recent years. You can expand your research beyond St. Louis to a bird's-eye view of Missouri. Take note of highly successful companies within your industry and analyze what factors made them come up with flying colors. Researching economic trends can also help you make more informed decisions about pricing, investments, and other areas that relate to valuation.

Step 2: Gather Financials

Gathering financials is a vital component of any valuation process. Understanding where your business stands financially is essential before attempting to assign value. Accurate and up-to-date financial information will provide a precise assessment of your company and help create a complete picture of its current state. Detailed documentation ensures you include all assets and liabilities.

You may want to include financial records such as;

● Balance sheets,
● Income statements, profit and loss statements,
● Cash flow statements,
● Capital expenditure reports,
● Tax returns,
● Contract copies

These documents should include historical data of 2-5 years for a complete overview of how your business has been running over time. A detailed analysis of these documents will provide evidence when negotiating with potential buyers or investors.

Step 3: Identity Assets and Liabilities

Assets are your small business's resources, such as cash, accounts receivable (from your debtors), inventory, property, and equipment. Knowing what these items are worth will be essential in establishing an accurate value for your business.

Liabilities include all debts owed by your business to creditors or suppliers, including short-term loans and long-term debt payments due over time. Identifying liabilities will help determine how much of these obligations must be paid before arriving at a valuation figure.

You should also evaluate intangible assets such as trademarks, brand recognition, copyrights, and software that may add additional value to your organization. A word of caution: Be realistic when evaluating the value of intangible assets.

Step 4: Evaluate the Current Cash Flow

You may wonder why cash flow gets prominence in the valuation process. There are reasons for this. Cash flow is more than just the money coming in and out of your organization. It suggests growth potential. Confident investors care more about your small business's cash flow than other figures when making decisions. Even if you have liabilities, there is more potential for growth in the cash flow figures based on your current business operations.

Step 5: Calculate Net Worth

Net worth is a measure of the total value of your business, including assets such as cash, equipment, and inventory minus any debt obligations. To accurately calculate net worth, you must know the current market value for all tangible and intangible assets owned by your business.

Research similar businesses to compare values with or obtain appraisals from professional evaluators. Remember to tally the liabilities to get an accurate picture of what you owe on loans and other debts. Finally, subtract liabilities from assets to calculate your small business's total net worth.

Step 6: Understand Tax Implications

The idea of pondering tax implications can be complex and daunting. Be aware of laws and regulations that affect taxation within your jurisdiction. You will want to be mindful of how taxes will impact the sale/purchase of your business.

Step 7: Set an Asking Price

An asking price will attract opinions and proposals from potential buyers, giving you an idea of your business value. It's vital to keep an open mind to the purchase price since buyers will present their views on how much they are willing to pay for your business.

Step 8: Hire a Professional Valuator

Most often, sellers and buyers appreciate an objective third party to complete the valuation. An intermediary will arrive at a fair market value with expertise based on verifiable metrics.
When choosing a professional for this task, consider the best value.

First Choice Business Brokers St. Louis offers so much more than a valuation. Our advisors match buyers and sellers, negotiate terms, and get the sale closed, staying with you throughout the process.

Contact FCBB St. Louis for consultation. We are here for you!