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    How to Value a Small Business

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    A Neumann & Associates, LLC assists clients in preparing for one of the most significant decisions they will ever make: selling a business. If you’re seeking to market your business for a substantial profit or are interested in knowing what your company would sell for, requesting the assistance of a professional business broker is a step in the right direction.

    In addition to the mergers & acquisition advisory, business brokerage, and financial services they provide, by visiting Business Valuation Virginia, you’ll find helpful information on valuing your small business in the Commonwealth of Virginia. Take the proper steps today and get the maximum value out of your business by seeking the help of a trusted partner who knows how to close deals and negotiate transactions.

    A Neumann & Associates, LLC offers mergers & acquisition advisory, business brokerage, and professional financial services to business owners in the Commonwealth of Virginia. Call today to schedule an initial consultation. 

    Factors to Consider When Placing a Value on Your Business

    There are four factors to consider when determining the value of your small business before going to market:

    1. Tangible Assets

    Every company has these types of assets, including real property, machinery, and inventory. This type of asset is usually a straightforward summation since the market value of the individual items is easy to obtain and calculate.

    2. Intangible Assets

     Also a significant part of what gives a business its value, intangible assets include items such as trademarks, patents, and other intellectual properties. Intellectual properties can add substantial value to a business, but they may also be difficult to appraise, which is why you need a professional business brokerage to realize their full worth. 

    3. Financial Metrics 

    The financial metrics of a business include a measurable track record of a company’s performance. These can include profitability, annual revenue, and debt-to-equity ratio, just to name a few. Knowing these numbers is essential to proper valuation, and potential buyers will be reviewing these metrics as part of the calculation that goes into their offer.

    4. Liabilities

    Company liabilities usually include accounts payable, notes payable, and bank debt. All businesses must take on liabilities to operate and grow. However, a potential buyer wants to see a proper balance of liabilities and equity that a company has a stable foundation.

    Valuation Methods for Small Businesses

    Price-To-Earnings Ratio (P/E)

    The price-to-earnings ratio (P/E)  is commonly used to value small businesses. This formula is best suited to companies that have an established track record of annual earnings. In most instances, the P/E ratio is determined by company profits. If a small business has a high forecast of growth, it may justify a higher P/E ratio. 

    If a business shows that it has an outstanding record of consistent earnings year over year, it may have an even higher P/E ratio. For example, using a P/E ratio of 5.0 for a small business that makes $400,000 in post-tax earnings produces a price of $2,000,000.

    Entry Cost Valuation 

    The entry cost valuation is how much it would cost to start a similar business from scratch, but it can also be fundamental in calculating a base value for your existing small business. This valuation method involves factoring in all startup costs, tangible assets, advertising/marketing budgets, recruitment and training costs, product development fees, and more. 

    Asset Valuation 

    To conduct an asset valuation, start with the itemization of all of the tangible and intangible assets to discover your net book value. Afterward, refine this figure by accounting for factors such as inflation, depreciation, and appreciation since these criteria can affect the asset value. The valuation method is best suited for small businesses that are stable and have a significant amount of assets.

    Which Valuation Method Should You Use For Your Business? 

    This will ultimately depend on the financial health of your business and other circumstances. However, it’s also important to understand that there will be valuation methods you won’t be able to employ because your business doesn’t match the required criteria. Talk to an experienced business broker who can determine which valuation method is best while considering every financial aspect of your business operations.

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