How Do You Determine the Worth of Your Small Business?
To determine the worth of your small business, look at your assets, consider your revenue and calculate your earnings, says the Small Business Administration. There isn’t a single way to figure out the value of your business but there are multiple methods that can come up with an approximate estimation.
Begin estimating the worth of a small business by evaluating the business assets, recommends the Small Business Administration. This includes all property and belongings owned by the business owner. A good way to find out about the assets in the most accurate way is to look at balance sheets and accounting books to look at purchases of various assets and then tally up the purchases.
Another good method is to calculate revenue in multiples, according to the Small Business Administration. This method uses a formula of revenue multiplied by x. To determine x, look at the industry standard. Some industries may be worth two or three times the revenue, which means x is 2 or 3. Other industries don’t multiple it and use a 1 for x, meaning the amount of revenue is the business value. If you are having trouble finding out this information, contact a business manager or stock broker.
Some business owners prefer to figure out the worth of a small business based on its earnings, instead of just revenue, notes the Small Business Administration. Since a high amount of revenue can still be achieved without actually making a profit, this is a good method to add to the other two methods. If the business has been operating for at least a year, look at the earnings for the last year to determine the business’ 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.