Owning and running a small business can be an extremely time-consuming endeavor, and may require a person to perform a variety of functions on a daily basis. As a result, a majority of entrepreneurs do not place business valuation at the top of their priority lists unless they believe a sale is imminent.  However, it is always smart to know the approximate value of what is likely your biggest asset—your small business.  Knowing the value of your startup can also help you get additional investors who want to know they are investing in a potential success, and can help ensure you are giving investors the correct share of your company for their investments. Learn more about getting investors here.

 

Small Businesses

Hiring a valuation specialist or business broker to conduct an appraisal can cost $1500 or much more.  Luckily, several online valuation computing tools are available for merely a fraction of the cost of hiring a professional.  Business owners can subscribe to cloud computing services such as BizEquity or BodeTree for approximately $365-$500 a year.  Furthermore, a valuations expert from the Stern School of Business in New York has developed a free iPhone and iPad value computing app called uValue.  Though some valuations experts claim these online computing tools are not nearly as precise as a real person, the cloud computing programs provide many affordable options for entrepreneurs to at least keep a running estimate of their business value.

 

No matter how you choose to value your business, you should understand the three different main approaches to business valuation.  First is the market approach, which is most commonly used to value a healthy business and is based on past earnings.  Next is the income approach, which is more forward-looking and relies on expected cash flow.  Finally, the asset approach more simply adds up a company’s current assets and is generally used for distressed or defunct businesses.

 

Startups

Startup valuation differs from valuation of an existing small business.  Startup valuation cannot rely on any past behavior, but merely focuses on the business’s potential and on how much money the startup needs to succeed.  Valuing a startup is important because it shows investors how much they will get for their investments.  Valuation is usually based on finding similar companies in the market, tailoring figures to this startup, and calculating best, worst, and base case scenarios.  If you want to value a startup, there are several online calculators that may assist you, many of which can be found on crowdfunding or investor sites at little to no cost.

 

- Claire Kalia

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