How to Determine the Worth of a Small Business
Calculating the value of your company might seem like a straightforward task but it's complicated and also speculative. Some of the variables depend on putting a dollar figure to perspective future sales and clientele. There are many more factors that go into this process so finding someone who knows the industry you are in can make this easier. Certified Public Accountants can help with the book work evaluations, and some keep abreast of market trends.
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Things You'll Need
- Bank statements (checking and savings) Accounts payable Accounts receivable Accrued payable payroll Long-term and short-term loans Inventory Real estate assets Current unbilled sales and contracts Projected earnings
Instructions
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Determining Cash Flow
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1
Collect all accounting documentation for checking, savings, money market accounts, all current and outstanding accounts receivable, payable, payroll, long- and short-term debts and accrued taxes. These records are an intricate part of knowing what your cash flow is.
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2
Take an accurate accounting of all inventories. This includes material and office supplies required to provide services and operating costs. These items have intrinsic value as they are worth what you paid for them.
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3
Make a list of the value of all physical assets such as real estate properties, vehicles and operating and office equipment. Real estate has a speculative value (nonintrinsic) so base the worth off of what you paid for it and weigh it against what you might get for it in the current real estate market. Vehicles and equipment are valued at a depreciating sliding scale.
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4
Gather the statistics for the previous 5 years of total gross sales. Gross sales help to determine what speculative assets (future business) you anticipate doing with the current and perspective clients that your business has and might obtain.
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5
Refer to your balance sheet. What is the bottom line? Are you operating in the black or in the red? Your best way of understanding what your company is worth is to look at your debt ratio to assets and your cash flow. Profits and loss vary too much to use them as the sole means for determining the worth of a company.
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Tips & Warnings
Though money may be tight, consider the importance of hiring a professional appraiser. Make sure they specialize in your industry. Do a thorough background check and ask for letters of reference. Remember, having an accurate picture of the value of your company will help you avoid losing money should you sell your business.
