You want to know the value of your small business. And this starts with an up-to-date valuation. Even if you don’t plan to sell immediately.
Small Business Trends spoke with Mark Zyla. And Zyla acts as Managing Director of business valuation and forensic accounting at Acuitas, Inc.
He explains what small business owners use these for. And he also speaks about what goes into one.
Face the Challenges
Zyla highlights some challenges small business owners face.
“Small business owners are usually part of the management team,” he says. “ That means there can be a mingling of the cash flows marked as a salary and return on investment.”
That means the smaller business needs to differentiate between labor and investment. And that usually does not become the case with bigger enterprises.
The differences between valuing smaller businesses and bigger ones don’t end there. Because the capital and tax structures often differ too. So valuing your small business might challenge you more than you think.
Examine Three Approaches
Basically three different ways to value your small business exist.
You base the income approach on the cash flow the business generates. But studying the transactions of competitor’s works as well. That’s a good way to see what the market bears.
“The third, which isn’t used as broadly is called the cost approach,” Zyla says. This is the cost of putting together all the assets of any particular business.
If you’re going to sell your business, you need to consider goodwill. This is an intangible asset. It includes factors like the value of an SMB’s brand name and the customer base.
Even things like good employee relations and proprietary technology can be included.
Once again, small businesses need to be careful here.
“It’s important to be able to distinguish between goodwill that’s attached to the person and the business itself” Zyla says.
He adds the value of your business gets bumped when you can develop successors internally.
In other words, it’s a good idea to ensure the value of your business’ goodwill doesn’t hinge on just one person.
Look at Regular Updates
Even if you’re not selling, regular updates matter so you can stay on top of your present valuation. This kind of exercise is important to bankers and lenders. It helps if a small business is looking to attract investors too.
Stay on Top
Staying on top of the differences between your assets and liabilities is a good practice.
“These also show that you’re on track for increasing value over time,” Zyla says.
Intangibles vary from business to business. But proprietary technology like software or processes make up one example. And a highly trained workforce makes another.
Recognized trade names in certain communities are examples too.
Zyla supplies an excellent example for SMBs with a good track record.
“If you have established relationships with customers. They return because they know the quality of your services and products. That enhances the value of your business.”
That means someone buying your company doesn’t need to find new customers.