Calculate Value of a Business

How do you calculate the value of a business?

Most small business experts agree the primary basis for the value of a small business is based on the maintainable profit of the business being multiplied by an industry multiple factor.

What is the multiple?

It depends on the industry and on the comparable sales evidence for sales of similar businesses in similar locations in recent times.

For example, a video store may be perceived to have a higher risk than a supermarket. A business with a government license may be perceived as more valuable than a business without (a taxi versus a courier). This is not always the case.

Of course, this is a very simple example and every business needs to be assessed holistically and with more criteria before an accurate valuation of the business can be completed.

To calculate the value of a business a business valuer must consider the trading hours, the staffing, the competition, the regulatory environment, the profit margins, the systems, the presentation, the tangible assets, etc.

If you try to sell your business without having it accurately valued, you may undersell it. Conversely, if you try to calculate the value of a business to buy it and you do not have access to accurate and recent data on comparable sales, you may make a disastrous mistake of paying far too much.

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