Valuing a small business is a complex process that involves many factors. In this expanded version of the article, we will provide even more detailed information on each step of the valuation process.

To find out how much your business is worth, you can use two methods: the multiples method and the discounted cash flow (DCF) method.

### The Multiples Method

The multiples method means finding out how much other companies like yours have sold for and then using that to work out how much your business could be worth. You do this by finding a multiple and multiplying it by your own company’s sales or earnings.

### The DCF Method

The DCF method looks at how much money your business will make in the future. You have to predict how much money you’ll make in the next few years, and then work out how much that money would be worth today. You do this by using something called the present value, which compares money you will earn in the future to money you could earn now.

Using three years of projected cash flow, the formula is:

Value = Cash flow year 1 + Cash flow year 2 + Cash flow year 3

(1+ discount rate)    (1+ discount rate) (1+ discount rate)3

Finally, you can use all of this information to figure out how much your business is worth. It might sound tricky, but if you keep good records and think carefully about the future of your business, you should be able to work it out!

Here is a typical misunderstanding:

Consider that your company has an office building worth \$800,000, as well as \$100,000 in supplies and products, and an \$100,000 fleet of vehicles. You have capital assets totaling \$1,000,000 in total, so you assume your business is worth what you would receive in cash if you sold everything right now. Even if the data shown above may be accurate, a business appraisal goes beyond that. This is just the cash value you’d receive from selling your assets, but this isn’t what your business is worth.

### Step 2: Figure out how much money your business is making by looking at its profits. This means looking at how much money it’s making and how much it’s spending.

To know how much your business is worth, you need to think about how much money it makes. A person who wants to buy your business will want to know how much money they can expect to make if they take it over.

When we talk about the money your business makes, we’re not talking about every single penny you earn. We just want to know how much money you make after you’ve paid for everything you need to run the business.

But that’s not all! When we value a business, we also think about two more important things:

• Multiples: This is a way to measure how long your business is likely to keep making money. A business that’s been around for a long time and is very stable will have a high multiple. A smaller business like yours will probably have a multiple between two and ten. To figure out your multiple, you multiply your profits by the number that makes sense for your business.
• Profitability adjustments: A business might not make the same amount of money every year. When we value your business, we need to figure out how much it might grow or how much money it might lose in the future. We do this by looking at your financial records from the past, what’s going on in your market, and what your competitors are doing.

If you want your business to be worth more, you can try things like getting more customers, selling new things, buying other companies, or opening up new stores.

### Step 3: Look at how much similar businesses sold for and use that to figure out a multiple. Multiply your business’s profits by this multiple to figure out its value.

However, there is more to consider. You must also assess the potential growth of your business in the future. Look at the historical growth of your business and your market and add 10% growth per year to your net profits for a few years to get an estimate of your business’s potential value.

It may take some time and assistance from professionals to gather all of this information, but it is crucial to determine the value of your business.

TheÂ valuationÂ ofÂ yourÂ companyÂ isÂ determinedÂ byÂ fourÂ components:

1. IdentifyÂ yourÂ netÂ income. TakeÂ yourÂ smallÂ business’sÂ grossÂ earningsÂ andÂ deductÂ allÂ costsÂ toÂ getÂ yourÂ netÂ income. Consider,Â forÂ instance,Â thatÂ yourÂ companyÂ earnedÂ \$1,000,000Â whileÂ incurringÂ costsÂ ofÂ \$700,000 (equipment, travel, supplies and salaries). ThereÂ isÂ \$300,000Â leftÂ over, which would be your net income.
2. AnalyzeÂ multiples

AsÂ wasÂ previouslyÂ indicated,Â theÂ lowerÂ theÂ multipleÂ youÂ mightÂ anticipate,Â theÂ riskierÂ orÂ smallerÂ theÂ firm. YouÂ mustÂ acknowledgeÂ thatÂ someÂ speculationÂ andÂ subjectivityÂ areÂ necessaryÂ inÂ orderÂ toÂ determineÂ yourÂ uniqueÂ multiple. TheÂ searchÂ forÂ aÂ definedÂ multipleÂ cannotÂ beÂ standardized,Â unfortunately. ThereÂ areÂ aÂ fewÂ fundamentalÂ guidelinesÂ toÂ rememberÂ instead:

Examine your sector. What multiples have firms similar to yours sold for in the past?
How stable has the financial history been for your company?
Can you request a greater multiple if it is stable enough?
What state will the company be in if you sell it after you leave?
Do you have any guaranteed contracts for revenue for the foreseeable future?
How big is your consumer base, and how solid are your ties with suppliers?
You must decide what you believe your multiple should be after considering your factors. Here is a quick reference:

• It is rare that a single employee-run company will get a multiple greater than three.
• Businesses with annual revenues below \$500,000 frequently have a maximum of five.
• only bigger businesses with net income over \$500,000
• OnlyÂ largerÂ businessesÂ withÂ netÂ incomeÂ ofÂ moreÂ thanÂ \$500,000Â mayÂ anticipateÂ reachingÂ aÂ double-digitÂ multiple.

Going back to our previous example, we said our net profit for the year is \$300,000. Our costs are \$700,000, which suggests that we have a sufficient number of employees. For the purposes of this example, let’s assume that we fall into the second bracket, leaving us with a number between two and five. Playing it safe, we’ll choose four, bringing our current worth to \$1.2 million (\$300,000 in net profit x 4x = \$1,200,000). Increase the company’s worth now based on prospective expansion. Although getting this information is not difficult,

## Step 4: Double-check your calculations and make sure you didn’t miss anything.

Knowing how much your business is worth is important if you want to sell it or find investors. It helps you show them how much money they can make by investing in your business.

The final step in valuing your small business is to consider other factors that may affect its value. These include:

• Liabilities: If your business has outstanding debts or liabilities, these can decrease its value.
• Economic conditions: Economic conditions can affect the value of your business. For example, during a recession, businesses may be worth less than during a boom.