Quick Business Valuation Methods

As a Business Broker one of the most common questions I receive from small business owners and entrepreneurs I meet is this the following: How do I get a quick idea what my business might be worth? More often that not, most of these individuals are just looking for a rough "street valuation" to determine if they should sell now or sometime in the future. Although there are many unique factors to consider when valuing any individual business, and there are generally no definitive or concrete rules on what any particular existing business maybe worth at any given time, below are a few widely used quick business valuation methods that should give most small business owners an adequate starting point to help determine what their business might be worth in today’s market place.

Multiple of Seller’s Adjusted Net Cash Flow:

The most widely used method to value and determine an asking price for a small business is based on the adjustment or recasting of a business's most recent annual profit and loss statement. The goal in this process is to determine the true earning power of the business by adding back to the net profit all the non-essential or discretionary expenses not necessary to run the business to demonstrate a more realistic net cash flow for the owner.

Once this number is determined, the next step is to multiply it by a business category related multiple (service, retail, manufacturing, etc) that are widely used as rules of thumb by the business valuation and business brokerage community. For instance, in general terms small service related businesses are generally valued at a multiple of somewhere 2 to 2.5 times the Sellers annual adjusted net cash flow. Small manufacturing businesses generally receive higher multiples that can be in the 3 to 3.5 times range.

There are a variety of resources available to the public to find and research cash flow multiples that may be relevant or specific to your business. This includes well known guides such as the Business Reference Guild by Tom West, and business for sale directories such as BizBuySell.com that provide a data base of recent business sales and the multiples achieved. You may also want to visit fastbusinessvaluations.com which provides a free online business valuation calculator based on widely used industry related valuation multiples.

I would also recommend if you are considering selling your business to contact a local professional business broker in your area. He or she may be able to provide you with valuable information about recent sales in your market of similar businesses like yours, and the net cash flow multiple that they eventually sold at.

Industry Rules Of Thumb:

Another commonly used quick business valuation method is to use a general rule of thumb. A rule of thumb valuation basically consists of using a simple formula that estimates the value of a business through a set of established and very general business pricing guidelines.