Small Business Valuation

The small business valuation gives the fair market value of the small business assets. Placing the accurate value for a small business may be difficult. But in the context of buying or selling a small business, the valuation is necessary and unavoidable.

The small business valuation may be required for various reasons. The valuation may be vital for the partnership deals, personal and estate planning or family business succession planning. When the business is in need for having finance from banks, the valuation is necessary. The small business valuation is also necessary in cases of divorce, business disputes, liquidation and spin-offs.

The value of small business can be calculated in various ways. The business owners can either use the various available software programs to determine the value of business or can go for full-scope valuation done by professionals. The valuation calculation price may also vary with the process of valuation. The software, on one hand, when is available at $15; the certified professionals, on the other hand, may charge thousands of dollars for determining the business value. If any business broker is associated with the selling of the small business, he can even calculate the business valuation for free. If the buying or selling the business also includes real estate then the business and real estate should be estimated separately.

The basic small business valuation methods are:

• Asset Based Valuation
• Income Capitalization Based Valuation
• Income Multiple Based Valuation
• Comparable Sales
• Rules of Thumb

The asset based small business valuation includes the valuation of the business assets and then establishing the fair market value for the same. Balancing the hard assets of the business that include furniture, equipments, fixtures and machinery is the major challenge faced by this method of valuation. Another challenge that this method experiences is that there arises a difference of opinion between the buyers and sellers over the value of used business assets.

In the income capitalization based small business valuation method; the future income stream of the business is calculated depending upon a variety of assumptions. The assumptions are generally based on the revenue projections and future operations.

In case of the income multiple based small business valuation method; the small business value is expressed as ‘x times earnings’. This method uses actual historical income data of the business rather than future income projections.