Image Source: Flickr

Image Source: Flickr

A lot of businesses today find it hard to accurately assess how much their small business is worth. After all, how do you place a dollar value on the years of immensely hard work, dedication and passion you have poured into your small business? But like it or not, eventually you are going to be forced to quantify the value of your business. In a recent article in Score.Org the valuation process is described .Before we proceed with the numerous ways to do it I suggest you go through This Article where brighter forecast is clouded.

The first valuation method determines the value of a small business based on its ability to generate profit during a specified period of time. To understand start by determining your small business’ net profit (gross income minus expenses) before interest and taxes have been paid. Next, multiply that figure by a “multiplier” — typically 3, 4, or 5. The multiplier is based on the number of years it will take a new owner to earn back his/her investment. So for a business that has a lot of assets, it is more appropriate to choose 5 as the multiplier because it will take longer to pay off the investment. For a business with relatively few assets, a multiplier of 3 would make more sense.

Another way of valuation method uses the value of the small business’ assets to determine the dollar value of the business. While an asset-based valuation method is not useful for every small business, it works well for retailers, manufacturers, wholesalers and other businesses that regularly own large quantities of fixed assets — i.e. equipment, inventory and overhead

The industry average valuation method estimates the total worth of your small business based on the sales price of other small businesses in your sector or industry over the past six to 12 months. This method is somewhat less precise than the other methods because no two businesses are exactly alike. Each business has variables that make it more or less valuable than its peers. Factors such as location, size of the customer base, company reputation, market share and others can make your estimate more accurate, but in the end it is simply an estimate. For that reason, this method is often used to produce a range of values during discussions between the buyer and seller.

A more thorough approach, and the most common, is the cash-flow method. The easiest way to do this is totally cash flow minus expenses. This number represents what a new business could make free and clear during his first year. If you have a start up or a very small business, the process is precise enough that you could do it on your own. You may be able to take a more accurate measure, however, by using a more complex multi-year projection of cash flow, called a discounted cash flow. Appraisers will factor in a discount rate, referred to as the buildup discount rate, which accounts for risk. This rate is usually allows the cash flow and includes such things as the growth rate of your particular industry and hazards associated with your small business. Ultimately none of these valuation methods offers an absolute and definitive value. Like your personal house, the true value of your business can only be determined by how much someone is willing to pay for it. In an anticipating manner for them, decide which of these methods makes the most sense for your state of affairs and go to work. Here’s the success story of a small business owner reaching success with a massive cash flow with a Small business loans .