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Valuing Small Businesses

by Jackson B

Small business valuation is very important especially for small enterprises or sole proprietors who are running on a tight budget. To determine the value of a small business, subtract assets from liabilities. For instance, if you own $100k in liabilities and only $30k in assets, your small business’s value is obviously less than its worth. With the asset-based approach, you can get the value of the business by subtracting the liabilities. The good thing with this method is that it doesn’t necessitate a lawyer or business adviser to assist you. All you need is an understanding of how to do it correctly.

A good future earnings, a clear business plan, an experienced accountant or bookkeeper and the right tools are needed when you want to determine the value of a small business. But where do you get these? One of the most popular ways used today is the use of a valuation calculator. With a valuation calculator, all you need to do is enter the data that you need and the software will give you the best estimates based on historical data.

There are two types of valuation approaches used today. There is the market approach, which bases its estimates on current market trends and conditions while the other uses past sales and transactions to project future earnings. The market approach assumes that the buyer of the business will be a motivated buyer; the other assumption is that the seller of the business will be motivated seller. If the buyer or seller of the business cannot be motivated, the valuation will be on the lower side of the estimated value.

There are many types of small business valuation calculator. One of them is the income and profit margin estimator. This is usually used by entrepreneurs who are new in the business market. They use this calculator to find out the profitability of their venture. In addition, this type of small business valuation calculator can also be used by the buyers and sellers to set the price of their assets or liabilities.

Another type of business valuation method used today is the property value approach. Here, the owner of the business is considered as the prospective buyer while banks or private investors are considered as potential lenders. Here, it is important to note that the valuation does not include the market value of the land where the establishment is built. On the other hand, the income-and-profit method considers only the cost of the property. Besides, this involves an accurate computation of the assets and liabilities.

The third common valuation method is the income-and-profit plus depreciation method. Here, the owner of the business is considered as the prospective buyer while banks or private investors are considered as potential lenders. Here, it is important to note that the income-and-profit plus depreciation method uses the latest accounting data and historical earnings and expenses. Besides, it determines the value based on the difference between actual and estimated costs or earnings. The downside of this method is that it uses estimates rather than real data.

The fourth common way of calculating the values of properties or its worth is by using the cash flow method. It is imperative for businesses to calculate their own fair market value (cash flow). It is a practical tool that allows entrepreneurs to determine the true worth of their assets in order to determine whether to sell them or not. The adjusted net income and cash flow method is used in order to determine if the owner of the enterprise can generate enough cash flow to support his operations.

The fifth widely used valuation method is the income-based purchase price method. Here, it divides the total earnings of the corporation by the number of stock holders to get the present value. This method is often used to determine the value of shares or common stock based on the assumption that future earnings will equal the present value of the earnings. If there is no increase in the earnings per share, then the share price would not be raised above the existing shareholders’ equity.


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