What are ways to determine the value of a small business?

On Behalf of | Feb 1, 2023 | Property Division

If your spouse has an ownership stake in your small business, you may have to determine the value of your enterprise as part of your divorce. Selling your business to divide some of its value to your wife or husband could be a possibility. Therefore, you should select an appropriate method to appraise your company.

Given that small businesses vary, there is no set way to valuate one. However, per The Motley Fool, you can learn a few common methods for figuring out the value of a business.

Assets and debt

A simple way to place value on a business is to subtract its debts from its assets. While a business may seem to have high value based on what it owns, its liabilities can do a lot to deprive its worth. Therefore, it is important to factor in business debt to yield a proper value.

Cash flow and profits

If you have a service business instead of a retail company, using the seller’s discretionary earnings method may be a better fit. An SDE determines your company value by looking at the income of your business and your level of profitability. This method could help if your business has few assets to appraise.

Comparison of businesses

Another method is to look at companies similar to yours to see what they have sold for. You will have to consider multiple factors to find a comparable business, such as your number of employees and your industry. Depending on the nature of your enterprise, finding a business that compares well to yours could prove difficult.

This is just a general look at business valuation. Whatever method works for your small business must conform to the specifics of your operation and the industry you work in.