How Small Businesses Can Determine The Value of Their Business

May 12 2016

business valuation

To small business owners, their businesses are typically the most valuable asset in their portfolio. However, determining or calculating the value can be tedious and costly. But with 26.5 million U.S. businesses out there and more employer businesses shutting down each month, it’s important to understand your company’s value. Third party business valuation analyses are detailed and require a significant amount of research and due diligence, but can cost thousands of dollars. However, it’s important to remember that business value isn’t absolute. Rather, it’s a process that helps to measure the worth of your business, depending on two major elements: how you measure your company’s value and under what circumstances you do so.

If a business owner isn’t looking for a full business valuation report and instead are only trying to determine a “ballpark” value for their business, there are other options.

Calculation Reports
Some appraisers will offer an abbreviated or limited scope report known as a calculation of value (or desktop appraisal). These are typically based on a limited amount of due diligence and the report is only intended for the owner (not outside sources such as attorneys, CPAs, etc). The cost of these reports will vary, but are typically at least $1,500 to $3,500.

Business Valuation Calculator
There are multiple online sources that offer everything from rules of thumb to actual business valuation calculators. Our firm developed one specifically for small to medium sized businesses called PeerComps, which focuses on actual comparable transactions (“comps”). The company valuation tool, or value calculator, is intuitive and based on real-world transaction data. The user simply inputs basic financial data and industry info, and it answers various questions about the business. The model takes about 15 minutes to complete and provides a 15-page calculation of value report.

The two options above are typically used for internal purposes only. A third party business valuation completed by a qualified appraiser would be used for purposes such as estate tax preparation, divorce, employee stock ownership plans, partner disputes (or any litigation), or lending. However, using an online tool or business valuation calculator could help determine a reasonable value to see if an owner wants to move forward with a more “formal” report.