5 Simple Steps to Valuing Your Small Business in Scottsdale

Are you looking for business valuation in Scottsdale? Well, Wiley Financial can help you identify your small business value. In this article, we highlight steps to value a small business. Let’s dive in.

What is a business valuation?

Business valuation is the process of determining a business value. It is done for various reasons, with investment being the primary reason. There are several business valuation methods and approaches.

Evaluators will choose the most appropriate depending on the nature of your company and might analyze a company’s capital structure and management to determine its fair market value. Wiley Financial is a renowned business valuator in Scottsdale with decades of experience. Give us a call to book a consultation.

5 Simple Steps to Valuing Your Small Business in Scottsdale

So how can you value your small business? Let’s find out.

1. Understand the valuation

Before valuing your business, you need to understand some essential terms. Professional evaluators in Scottsdale use them to speed up the valuation process. They include:

Seller’s discretionary earnings (SDE)

SDE is a term used in EBITDA, which is earnings before interest, taxes, depreciation and amortization. It calculates the accurate profit of a company. Business owners calculate SDE to determine the company’s fair market value. As such, you’ll include all revenue your firm generates, your salary and benefits.

Ideally, SDE is ideal for small businesses, while EBITDA suits large companies. The SDE also helps a prospective buyer to understand how you came up with the business’s value.

Calculating SDE

Calculating your firm’s SDE is easy. First, add your pretax and pre-interest earnings. Include expenses that are deemed nonessential but are included in your business’s report. They can include charitable donations, travel, your salary, and travel. Finally, deduct liabilities from your firm’s income.

SDE multiples

As you’ve seen, we use SDE to determine the actual value of your business. SDE multiples use industry standards to value your company. For example, if you use the EBITDA standard, you’ll be required to use its multiple.

However, since yours is a small company, you should use SDE because much of your expenses are personal. Also, the firm’s industry will affect the SDE multiple you will use. The company’s size, location, and assets will affect the multiple market volatility. The higher your SDE multiple, the higher the firm’s value.

Organize your finances

As you’d guess, evaluating a small company in Scottsdale is a daunting task. As such, we recommend hiring a professional accountant specializing in business valuation. Wiley Financial is such a company that can help in business valuation in Scottsdale.

However, you need solid financial records if you prefer to go alone. They will help you to do an accurate valuation. Besides, you’ll need money during the transfer of business ownership. Some of the documents you’ll need for a seamless valuation process are:

• Tax filings and returns.
• Proprietary documents such as licenses.
• Profit and loss statement for the last three years.
• An overview of your business finances.

A clear understanding of your business’s financial foundation will help you decide before selling your business.

Track your assets

To ensure you sell your business at a profit, you need to tack stock of your assets. You need a list of all your firm’s resources, including all assets and liabilities. You can also include intellectual property, employee property, investments and cash. Getting input from a professional evaluator such as Wiley Financial will improve the process. Alternatively, you can seek help from a mentor. They will help you identify all assets and liabilities of your business. Assets come in two categories: tangible and intangible assets.

Tangible assets: These are your company’s holdings and material property. They can include cash on hand, inventory, real estate, and means of production.

Intangible assets: They are non-material assets that add value to your business. They are crucial when determining your SDE multiple. Some examples include trademarks, brands, reputations, and patents.

You’ll also need a good understanding of your liabilities. As mentioned, a liability is anything detracting from the company’s value. They can include business loans, accounts payable, notes payable, expenses, and unearned revenue.

If you are selling your business, you’ll need a business plan and model to help a prospective buyer understand how it generates revenue. A business plan will help you make accurate projections and investment decisions.

Besides, it helps the potential buyer understand how the business will grow in the future and increase profit margins. It should capture critical products and services you offer and enable the buyer to understand your company’s important context.

A robust business model demonstrates how your company makes money. For example, a subscription-based service or B2B consultation. The model will show the potential buyer how they’ll reach their target customers, generating income if they buy the business.

Understand your industry

Understanding the industry is crucial for you and the potential buyer. Before buying the company, the buyer must be well-versed in the industry. And for you, the seller, it helps you keep abreast of industry trends, enabling you to do an accurate valuation. As mentioned, a company’s SDE multiple is dependent on the industry. So, research similar companies or comparables to help you understand the state of the industry. Knowing similar companies will help you assess your position and growth potential. You can then show prospective buyers why your company is better than your competitors.

Arrive at a conclusion

Finally, it’s time to sell or seek funding. You’ll need to accept the market’s state for an accurate valuation. As they say that a company’s value is worth a market’s demand. If your industry has taken a dip, then the value of your business will be low.

As such, timing is crucial when evaluating your small business in Scottsdale. You can contact us if you need a professional business valuation in Scottsdale.

Approaches to valuing a small business

Generally, business valuation methods are nested within three approaches: income, asset, and market. They use different variables to evaluate a company. While you can use either, it is prudent to use at least two, compare the results, and use the one that seems more accurate. If this is daunting, consider contacting Wiley Financial.

Market approach

It is the most appealing approach for evaluating your small business in Scottsdale. All you need is to identify companies that are similar to yours. The main methods are:

Guideline transaction

Unlike guideline transactions, this method uses data from publicly traded companies like yours. It enables you to select companies with similar business models, operations, and economic conditions.

Asset approach

The asset approach is referred to as the cost or replacement cost approach. It determines the company’s value by detecting all liabilities from assets. The methods used are:

Adjusted net asset method

It is the primary method used in the asset approach. The evaluator in Scottsdale will use the difference between the fair value of a firm’s assets and liabilities. It sets a company’s floor value, which could be realized if its assets were sold and liabilities settled. It is, however, ideal for capital-intensive and holding companies.

Capitalization of excess earnings method

The method uses income-based and asset-based approaches. It values a company’s tangible and intangible assets separately and uses the return on tangible assets rate and intangible assets rate. It is, however, used as the last option according to Revenue Ruling 68-609.

Income approach

It is one of the most popular approaches for evaluating small businesses. There are two primary methods.

Capitalization of cash flow (CCF)

This single-period valuation method converts a company’s cash flow into value by dividing it by the capitalization rate. You can use it when you expect long-term stable cash flow. The evaluator will use historical data to make future projections.

Discounted cash flow (DCF)

DCF is a multiple-period method that uses future cash flow to determine the company’s value. It assumes the current company’s value is its future projected cash flow. An evaluator will use the company’s management projections to determine the value.

You can call us to book an appointment if you need a small business valuation in Scottsdale.

Original Source: https://wileyfinancialinc.com/5-simple-steps-to-valuing-your-small-business-in-scottsdale/