This comes up often with small business owners – what is your business worth today? Many small business owners don’t usually have a clear answer or even an idea of how to value what they are building. I thought I would share some basic information about how to answer this question for those business owners that may just need a little bit of guidance.
Valuing a private small business is certainly a very difficult exercise. As we all know, value is really a reflection of what someone will pay for something and when it comes to private businesses this can be a difficult point to get consensus on.
Get a copy of your recent balance sheet and profit/loss statement (or income statement) for the current year and the previous year. Here are some numbers you will need:
1. Your net income from last year and this year (found on your profit/loss statement)
2. A list of cash, current assets and equipment (found on your balance sheet)
3. A list of debts of the company (found on your balance sheet)
Determine the average of your net income by adding last year’s net income to this year’s net income and dividing by 2. Take that number and multiply it by 3. This is how much your the income of your business is worth. Now from this number add the cash, current assets and equipment of the business and deduct your list of debts. The remaining number represents a rough estimate of what your business is worth.
2 Year Net Income Average less Net Debt
If you business has a lot of debt you may not be happy with the result. If your business does not have a lot of debt then you may be surprised that your business is not worth more. It very well might be but anyone who looks at your business will evaluate each of the pieces separately.
This is a good exercise to work out on the back of a napkin on a regular basis so that you can think through what would change the results. More income, less debt, more assets, etc.
“The best way to predict the future is to create it.” – Peter Drucker
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