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An acquaintance who is contemplating putting his small business on the market soon has been doing some preliminary research to calculate the value of his company. He’s seen numbers that seem quite high and others that seem too low. What is the best way to get an accurate valuation?

There are many ways to arrive at an accurate valuation, according to the lenders and business professionals I reached out to. Here are a few tips they offer for anyone about to embark on the exciting yet stressful adventure of listing his company for sale.

number 1 iconGather all relevant financial and operational data. This is a good starting point, according to Shashank Agarwal, founder of Expanding Ourselves, a website about data science, business and personal development. “To get an accurate valuation, it’s important to have a comprehensive understanding of the company’s financial and operational performance,” Agarwal explains. “This includes financial statements, tax returns, cash flow projections, and other key data that can help to paint a clear picture of the company’s current and projected value.”

number 2 iconConsider industry trends and benchmarks. This will help ensure the valuation is accurate and reflective of industry standards, according to Agarwal. “This can involve researching comparable businesses and transactions in the same industry, as well as taking into account broader economic trends that may impact the company’s value,” he explains.

number 3 iconDetermine the appropriate valuation method. “There are several different methods that can be used to value a small business, including the market approach, the income approach, and the asset approach,” Agarwal says. “Each method has its own strengths and weaknesses, and the appropriate method will depend on the specific characteristics of the business being valued.

number 4 iconFamiliarize yourself with the language and vocabulary typically used in these transactions. That advice comes from David Farkas, founder and CEO of link-building company The Upper Ranks, who gives two examples: DCF/Discounted Cash Flow and SDE/Seller’s Discretionary Earnings.

“The DCF approach does not take into consideration the outcomes of other firms. It is instead concerned with your company’s predicted cash flow,” Farkas says. “You will provide your most accurate cash flow prediction for the following three to five years. The present value of those cash flows will then be calculated using a formula.”

“A DCF model is based on the idea that a company’s value is determined by how well the company can generate cash flows for its investors in the future,” information from Forage explains.

SDE, on the other hand, is a technique that stresses profitability and cash flow — “sometimes seen as the heartbeat of a small firm,” Farkas says. “Because the formula does not benefit firms with a lot of assets, such as retail enterprises, this strategy works well for service organizations.”

According to information from “How to Plan and Sell a Business,” the SDE formula “is typically the net income (or net loss) on the company tax return + interest expense + depreciation expense + amortization expense + the current owner’s salary + owner perks.”

To get the most accurate, unbiased valuation, hiring a professional is a good idea, Little says.

“Ultimately, an accurate valuation of the business requires a combination of quantitative and qualitative factors, and the knowledge and the expertise of the people performing the analysis,” he explains. “I always recommend having a professional, outside opinion since business owners can sometimes valuate optimistically in an attempt to secure financing.”

Considering a business purchase or partner buyout? Talk with a Byline Bank business banker today about how we can help.


This article is written by Kathleen Furore and Tribune Content Agency from Careers Now and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to [email protected].