Guide to small business valuation

Knowing what your business is worth: A guide for sellers and buyers

You’ve invested time, energy, and vision into building your business. Understanding its value goes beyond revenue and assets; it’s about seeing the bigger picture.

A business valuation can give you clarity, whether you’re preparing to sell, planning for retirement, seeking financing, or simply mapping out your next steps. Knowing where your business stands today helps you make confident decisions for the future.

What is a business valuation?

A business valuation is the process of determining the fair market value of your company. Think of it as a financial health check that combines both the tangible and intangible parts of your business. Professionals may use several approaches:

• Asset-based: Looking at what your business owns versus what it owes
• Market-based: Comparing your business to similar companies in your industry
• Earnings-based: Projecting the future value of your profits

Each approach paints part of the picture, and together they provide a well-rounded view.

Why knowing your business’s value matters

Valuation can help you make informed decisions. Business owners often seek valuations for reasons such as:

• Preparing to sell or buy a business
• Planning for retirement or succession
• Settling ownership disputes or legal proceedings (E.g., divorce)
• Strengthening small business loan applications or raising capital
• Understanding strengths and weaknesses to guide growth

Knowing your worth brings confidence, whether you’re making a big decision or simply planning.

The role of financial and non-financial factors

A strong valuation depends on both financial records and less tangible assets. On the financial side, documents like profit-and-loss statements, tax returns, cash flow reports, and supplier contracts reveal how money moves through your business. On the non-financial side, items like intellectual property, customer relationships, goodwill, and even your brand reputation add meaningful value.

When both sides are reviewed together, you get a more complete understanding of what your business brings to the table.

Common business valuation methods explained

Different businesses call for different approaches to valuation. Here are some widely used methods professionals may consider:

• Net asset method: Subtracts liabilities from total assets to calculate value
• Earnings multiples: Uses past or projected earnings to set value
• Discounted cash flow: Focuses on expected future cash flow, adjusted for risk
• Market comparison: Looks at recent sales of similar businesses
• Book value: Adds up assets and subtracts debts for a straightforward figure
• EBITDA or Seller’s Discretionary Earnings (SDE): Highlights financial performance by adjusting for expenses, taxes, and owner compensation

Each method has pros and cons, and many owners turn to an advisor to find the right mix for their situation.

Where professional help makes sense

Online tools and quick estimates can give you a ballpark figure, but some situations call for expert guidance. If you’re applying for financing, preparing for legal proceedings, or handling complex ownership transfers, it’s often best to work with an accredited professional. That could mean a CPA with an Accredited in Business Valuation (ABV) certification from the AICPA. Or a qualified appraiser from the American Society of Appraisers (ASA).Their expertise ensures your valuation is thorough, reliable, and defensible when it matters most.

Goodwill and other intangible assets

Some of the most valuable parts of a business can’t be touched or measured on a balance sheet. Goodwill, brand recognition, loyal customers, and intellectual property all play a role in setting value. When buying or selling, these intangibles often explain why one business is worth more than another, even when their financials look similar.

How much does a valuation cost?

The cost of a professional business valuation can vary widely depending on the size, complexity, and industry of the business. While smaller valuations may cost a few thousand dollars, more detailed reports for larger companies can be much higher. Many owners see it as an investment; an upfront expense can yield clarity, peace of mind, and stronger negotiating power later.

Quick ways to get an estimate

If you’re not ready for a full formal valuation, there are simpler ways to get a ballpark figure. Comparing industry benchmarks, reviewing your profit trends, or using online valuation tools can give you a starting point. While these won’t replace a professional assessment, they can help you set realistic expectations and prepare for the next steps.

Valuing a startup

Startups often don’t have years of financial history, so their value is usually based on forecasts, comparable businesses, and potential growth. Investors may also weigh factors like intellectual property, technology, and the strength of the founding team. If you’re building a startup, valuation is as much about your story and vision as it is about your numbers.

Moving forward with confidence

Knowing what your business is worth helps you make smarter choices. Whether you’re planning to sell, bring on investors, or simply understand your company’s position, a valuation is a valuable tool for growth and security. By working with professionals and gathering the right information, you can approach the future with confidence and clarity.

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