There are a number of reasons you might need to calculate your business’s worth. Whether you’re planning to sell, valuing assets for a divorce or tax purposes or have another reason, your accountant will likely use one of several small business valuation methods.

Here’s a brief overview of how to calculate business valuation.

What is business valuation?

It’s smart to have your business valued periodically. If you’re thinking about adding a new partner, selling all or part of the business, divorcing a spouse or merging with another company, you’ll need to know the financial value of what you’ve built. It’s also key for tax purposes: Shares are taxed depending on the business valuation.

When a business is valuated, accountants may review its asset market value, how the company is organized and managed, future profit projections and its capital structure.

Types of small business valuation methods

There are several key methods to determine your business’s worth. These types of business valuation calculator include:

• Book value: Book value is a very simple method of valuation: It simply subtracts total liabilities from the total assets available. This is a good option when you have valuable assets but low profits.
• Discounted cash flow: The discounted cash flow (DCF) method takes inflation rates into account, along with projected future cash flow. This makes it more accurate than the earnings multiplier; it’s similar, but the earnings multiplier method does not adjust for inflation.
• Earnings multiplier: This is also known as the time revenue method. The earnings multiplier method takes future projected profits over a certain period of time and then adjusts them against cash flow that could be invested for the same period. This is usually a more accurate valuation than the time revenue method.
• Liquidation value: If all assets were liquidated and liabilities paid off, the liquidation value is what you’re left with.
• Market capitalization: Market capitalization uses the company’s share price multiplied by the number of outstanding shares. If your company’s shares are trading at $100 each and you have 50,000 shares outstanding, your company would be valued at $5 million.
• Times revenue: This method uses your historic revenue stream data and a multiplier. The multiplier depends on the economic environment and the specific industry you’re in and can change over time.

The type of small business valuation method you or your accountant chooses can make a big difference in how the numbers are presented. For example, not every company offers stocks. Some companies own very few assets, while others may have put the majority of their startup capital and profits into appreciable assets. Depending on your business type and why you’re performing the business valuation, you may wish to use a specific method.

Medina & Company Consulting is happy to help you find out what your business is worth. Let our team of seasoned accountants assist in small business valuation, as well as a host of other accounting and forensic accounting services. Call us today to get started.