There are a handful of ways to estimate the value of a small business in preparation for a sale. Most commonly, these methods are based on property and assets that the company owns, or a mathematical method involving certain line items, such as net income or revenue. Simple comparisons to other business sales may suffice.

The Asset Method

The asset method values a business by adding up the sum of its assets. It’s a very predictable method of valuation; any competent accountant can look into the books, accurately assess values, depreciate them if necessary, and add them up. As a simplified example, assume a company has the following assets:

• Property: \$1 million
• Equipment: \$250,000
• Accounts Receivable: \$50,000
• Inventory: \$125,000

Assume the accountant reviewing the books calculates that \$40,000 of depreciation should be applied. The valuation of the business based on this method is then:Valuation = \$1 million + \$250,000 + \$50,000 + \$125,000 – \$40,000 = \$1.385 million

The Market Approach

This is the most subjective approach. The market approach attempts to compare businesses that are in the process of being sold and meet the following three requirements:

• Same industry
• Same size
• Same geographic region

For example, a manufacturer with \$1 million in revenues wants to sell. Four companies in the region have the following sales price and revenues:

1. \$2 million price, \$1 million sales
2. \$10 million price, \$5 million sales
3. \$975,000 price, \$900,000 sales
4. \$3 million price, \$1 million sales

The second company can be ignored, since it’s likely not the same size, based on its revenue. The other three can be averaged to arrive at a valuation of \$1.991 million.

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