May 26, 2020 MicroBilt News
The COVID-19 pandemic, subsequent shutdowns, and widespread unemployment have been tough on small businesses throughout the country. Add to that the fact that programs intended to aid small businesses during these trying times largely went to larger businesses that didn’t have the same concerns small businesses face and it has been a relative nightmare for small business owners. For many small businesses, the aid that has been promised simply hasn’t arrived – for others it hasn’t arrived quickly enough to make a difference.
In fact, many small business owners are opting to sell their small businesses in search of greater stability during these trying times. You want to get a fair price for your business, which is why it is so important for you to have access to the right business valuation tools.
What is a Business Valuation?
Essentially, a business valuation is an estimate of the economic value of the owner’s interest in a business. It is a tool buyers often use to determine if they are interested in purchasing your business and how much they are willing to pay for your business.
As a seller, you can use this tool to determine the worth of your business through the eyes of potential buyers and to help you set the price for which you are willing to part with your business.
Fortunately, business valuations do not focus on a single moment in history to determine the financial “worth” of a business. Instead, they focus on several mitigating factors over time.
Methods Used for Business Valuations
There are several methods used for business valuations. Some prospective buyers and sellers use multiple methods of valuation to determine the price at which they are willing to buy or sell the business. Common business valuation methods include:
- Adjusted book value valuation. Determines value based on the assets and liabilities of the business.
- Asset Valuation. Uses business inventory and improvements to determine the value as well as the location of brick and mortar locations of the business.
- Cash flow method. Many consider this the best tool for business valuations as it uses the loan amount businesses would qualify for based on its cash flow.
- Debt assumption method. Determines the value of a business based on the amount of debt the business could assume while continuing to operate.
- Tangible assets method. Also called the “balance sheet” method, this method determines the worth of a business based on its current tangible assets.
- Intangible assets method. This method utilizes assets that can’t be easily quantified, such as an active customer base, to determine the value of the business.
Investors interested in purchasing start-up companies may consider the cost-to-create method where buyers interested in established businesses might calculate time and money saved compared to the capital required to replenish missing supplies and/or infrastructure.
At first glance, it’s all very complex. While once there was a lot of time, effort, and energy involved in the business valuation process, the right set of business valuation tools can help you determine, in a matter of minutes, the value you’d assign to your business – even in these trying economic times.