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There are numerous reasons for valuing a small business such as selling or buying a business, presentation for investors, financing, death or a valuation might be needed for estate and gift tax returns, buy-sell agreements, litigation, tax challenges or a divorce.
Valuing a company is truly the toughest part of the process and accurately valuing a small business, however, can be complicated. Business valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business.
There are many approaches to valuing a small business, ranging from simple rules of thumb, such as gross revenue multipliers, to more sophisticated techniques such as discounted cash flow.
Three different approaches are commonly used in business valuation:
One of the most common methodologies for valuing a small business is the cash flow multiple but valuation techniques used will depend on what sort of asset is being valued.
A valuation will highlight the things that make a business valuable, and show you ways that you can increase what your business is worth. The valuation should also include assets and liabilities of the business, including accounts receivable (discounted for bad debts) ,equipment, supplies, and other tangible assets cash.
In the case of a divorce, valuing a small business is often the most difficult part of the case. The difficulty of valuing a small business in divorce arises not only from limited funds but from limited cooperation by the owner-spouse.
Above all, you should realize that valuation is an art, not a science.
Daniel Iuculano
Financial Planner
