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How do you determine the worth of a small business?

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Quick Answer

Worth of a small business is valued based on net income plus any property or inventory the small business holds, according to Wealth Pilgrim. The owner's personal salary is taken out in the calculation of net worth.

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Full Answer

The net worth of a business is based on the monetary value that a buyer is willing to pay and is not relevant to the amount the seller is willing to accept for the business, explains Wealth Pilgrim. Other factors, such as risk of business venture, saturation of market and growth sustainability should be evaluated when determining net worth.

A market analysis of the business in comparison to others of the same concept also helps determine the net worth of a business, states Wealth Pilgrim. Utilizing budgeting software to run analysis on the past three to five years of business shows a year-over-year view of the net worth. Calculating over several years provides an understanding of where the business is in relation to competitors in the market. If the business has seen significant year-over-year growth, that growth should be factored positively into the net worth of the business. If a declining or need-to-sell business system exists, it also has an impact on the value of net worth. Net worth can change depending market fluctuations and needs revisited regularly.

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