How to Value a Small Business Before You Sell
By David Hollis, Director · 6-minute read
Most owners have a number in their head for what their business is worth. Fewer know how a buyer will arrive at theirs. If you're thinking about selling in the next few years, knowing how to value a small business early gives you time to raise that number, not just guess it.
The three common valuation methods
1. Earnings multiple. The most common method for established, profitable businesses. A buyer looks at your normalised earnings (often EBITDA, or seller's discretionary earnings for smaller firms) and multiplies it by a figure that reflects risk and growth. Lower risk means a higher multiple.
2. Asset-based. The value of what the business owns, minus what it owes. It's used more for asset-heavy businesses, or as a floor when earnings are low.
3. Discounted cash flow. An estimate of future cash flow, brought back to today's value. It's useful when the business is growing fast, but it depends heavily on the forecasts behind it.
What quietly lowers the multiple
Buyers pay for earnings they believe will continue without you. Things that make them less sure include a business that depends on the owner, a few customers making up most of the revenue, messy or late financial records, and revenue that has to be won again every month.
4 things you can fix in the next 12 months
1. Move key client relationships to a second person. 2. Get monthly financials closed on time, every time. 3. Turn one-off work into service agreements where you can. 4. Write down the processes only you know. Our Exit-Ready Checklist walks through each one.
FAQ
How long does a business valuation take? A formal valuation usually takes a few weeks, depending on how ready your records are.
Should I get a valuation if I'm not selling yet? Yes. An early valuation shows you what to fix while you still have time.
General information only. Speak to an advisor about your own situation.