News & Resources

Business valuation tools to help sales strategies

Mar 10, 2011 Karen Umpierre

The recession has been tough on small businesses, as has the recovery. And while financing is beginning to open up again, for some entrepreneurs the funding is not coming fast enough. Therefore, owners looking to sell should know their exact business valuation to help them seek out buyers.
 According to Small Business Notes, common methods for calculating the value of a business include the adjusted book value, based on the assets and liabilities of a business. A popular valuation tool for retail and manufacturing businesses is asset valuation, based on the company's inventory and improvements made to its brick-and-mortar location. For companies with high product turnover, the cash flow method may be the best way to estimate a business' value, as it's based on the size of a loan the company could get based on its cash flow, adjusted for depreciation, equipment replacement and other costs of operation. The debt assumption method usually gives the highest price, Small Business Notes says, and calculates how much debt a business could take on and still operate. For businesses that are losing money, the tangible assets - or balance sheet - method may be the best route for estimating value. In this method, the value of the business is calculated from the worth of its current assets. If a company has a well-established customer base, that "intangible asset" can be a great tool in boosting value. Intangible assets are generally valuable to insurance or advertising agencies, the website writes, and are derived from the cost the buyer would pay to generate the asset themselves. Investors looking to buy a startup company typically use the cost-to-create approach, where the buyer of an already-started business calculates how much he or she has saved in time and estimates how much he or she would have to spend to fill in missing supplies or infrastructure. Having this information can help a small business owner develop strategy on how to market his or her company to buyers and speed up the selling process. Taking too long to sell a business may hurt an owner, Inc. magazine reports, as capital gains taxes may increase to 20 percent and bite into profits made from a sale. The tax clock is not the only one ticking however; the biological one is too as more baby boomers retire, the magazine reports. Some economists estimate that up to 70 percent of private business owners will put their companies up for sale over the next decade. A flood of businesses on the market could also drive down valuations, meaning entrepreneurs could struggle to win high payouts for a long time, the magazine says.