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How To Determine The Value of a Small Business
By Quiet Light
When selling a small business, both the seller and the buyer need to understand the true value of the business. A proper valuation ensures that sellers receive the proper compensation for their years of hard work, assets, and intellectual property. A proper valuation also ensures that buyers fully understand the business they are acquiring.
There are a number of business valuation methods that explain how to determine the value of a small business. Let’s discuss some of the more common valuation methods so that you can determine the most appropriate method for your business or acquisition.
“When selling a small business, both the seller and the buyer need to understand the true value of the business.”
In this article, we discuss:
- The Multiple
- Four Pillars of Value
- Market Comparison
- Asset-Based Method
- Discounted Cash Flow
How do you calculate the value of your small business?
To calculate the value of your small online business, you can use the ‘SDE Multiple Method.’ The SDE Multiple Method is a common valuation approach for online businesses, and the equation is simple on face value:
SDE x The Multiple = Value of Small Business
Seller’s Discretionary Earnings
Seller’s Discretionary Earnings (SDE) are the pre-interest and pre-tax profits that a business generates prior to reconciling the owner’s benefit, one-time investments, non-cash expenses, and non-related income or expenses. SDE is useful when buying and selling online businesses because it shows the business’s true earning potential. The expenses that are unlikely to transfer to a new owner when the business is sold are excluded from the equation.
A business’s multiple is determined by the Four Pillars of Value that include:
The multiple reflects how valuable a business is relative to its SDE. A qualified business Advisor can work with you to determine the most accurate SDE and Multiple and determine your true business value.
“This method is useful and popular because it involves the careful consideration of a multitude of factors.”
This method is useful and popular because it involves the careful consideration of a multitude of factors. Through the SDE multiple method, business owners can gain insight into opportunities to enhance the value of their business. Potential buyers can gain deep insight into the growth potential and possible challenges they may encounter as the owners of the business.
Different Types of Business Valuation Methods
While the SDE Multiple Method is the most common valuation method for small online businesses, let’s discuss a few different types of business valuation methods you may encounter when you are exploring how to sell a small business.
Market Comparison Valuation Method
The market comparison valuation method determines your business value based on the selling price of similar businesses. In order to serve as a helpful comparison, the reference businesses need to be in the same market, have a similar customer base, and generate comparable revenue.
“This method is useful for generating a quick, ballpark estimate, but it certainly lacks precision.”
This method is useful for generating a quick, ballpark estimate, but it certainly lacks precision. Only so much information is publicly available, and much of what goes into an accurate business valuation is kept private.
Asset-Based Valuation Method
The asset-based valuation method considers your asset and liability figures that are quantifiable. The assets include everything that has cash value, including real estate, equipment, and inventory. Liabilities include business debts. The equation for this valuation method is:
Assets – Liabilities = Value of Small Business
“This method is straightforward, but it does not account for important intangible qualities…”
This method is straightforward, but it does not account for important intangible qualities of your business that could potentially impact the value of your business.
Discounted Cash Flow Valuation Method
The discounted cash flow valuation method determines the value of your business based on predictions of future performance. This forward-looking method estimates future cash flows and discounts these numbers into current dollars. Financial risk is also factored into this valuation method.
“This method can be appealing because it focuses on cash flow, but it can easily lead to inflated or underestimated business value.”
This method can be appealing because it focuses on cash flow, but it can easily lead to inflated or underestimated business value.
Determine the Value of Your Business with Quiet Light
Once you tell us that you would like to determine the value of your business, we will schedule your initial valuation call. Even if you are not sure whether or not you are ready to sell, you can get a sense of how to set yourself up for maximum acquisition value when you are ready.
During the free valuation call, you and your Quiet Light Advisor will evaluate the most up-to-date multiples for your niche, plus factors like your team, run rate, and inventory. Assessing these factors with an Advisor will give you a value range for your business.
If you would like us to sign an NDA before getting on the call, we are happy to do so.
To discover the value of your online business, with no strings attached, sign up for a free valuation with Quiet Light today!