A business appraisal is the process of understanding how much your small business is worth. If you’re looking to sell your company, the business appraisal is a key part of the selling process and will help you ensure you maximize your sale price.

Your business is your livelihood — and you want to make sure you’re getting the right price for it. Here’s our guide to what a business appraisal is and how it works.

What is a business valuation?

A business valuation is an estimate of what a buyer would be willing to pay for your business, taking into account factors such as the company's assets, liabilities, and earnings potential. The appraiser will also consider the current market conditions and compare your business to similar businesses that have recently been sold. This will give you a good idea of how much your business is worth and how much you can expect to receive if you do decide to sell.

To sell your business successfully, you’ll want to align your expectations with what a buyer is willing to pay, which is where a business valuation can help you manage your expectations and know what price to list your company at.

While many owners will use a business valuation when deciding to sell their business, there are many other reasons why you may want to conduct a business valuation. A business valuation can help you:

• Increase the value of your business.

• Track progress as you grow your business

• Determine the right time to sell

• Make certain legal processes, like divorce or a business breakup, more efficient    

What does a business appraiser do?

Business appraisers work with companies looking to sell their business or those who need to know the value of their business. They analyze your business information and other financial documents in order to understand how much your business could be worth.

The appraiser will use a variety of methods to determine the value of a business, including analyzing financial statements, observing market trends, and considering the unique factors that contribute to the company's value. The goal of the appraiser is to provide an objective estimate of the business's worth, which can be used to make important decisions about its future.

Breaking down the process of valuing a company

There are many different methods for valuing a company. Keep in mind that these different valuation methods will produce different results, so you may want to use multiple methods and then compare the results. But, there are some key components that go into all business valuations.

How much profit does your business generate?

Profitability is arguably one of the most important factors when valuing your business. There are a few ways to interpret profit. For instance, net income measures revenues minus expenses, while your seller discretionary income gauges how much a business owner typically pockets post-taxes. Other metrics that may factor into valuation include EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) or free cash flow, which quantify actual money generated by operations.

What’s the value of your assets?

This includes the value of your tangible assets (like inventory and equipment) and intangible assets (including intellectual property and brand reputation). Buyers will likely take into account the current market price of the same assets compared to buying them along with your business.

What will the market support?

Some businesses will cost more than others, based on the industry they’re in and the services they offer. The more competition a certain business or industry has, the higher the purchase price for those businesses may be.

Understanding various business valuation methods and approaches

There are a few ways to value your business that can help you determine how much your business is worth.

Considering Asset Approach

This approach values the business based on the net value of its assets. This includes both physical assets, such as buildings and equipment, and intangible assets, such as patents and customer lists.

The asset approach method is often used when a business is being sold or acquired because it provides a clear understanding of what the business is actually worth at that moment.  If you're considering using the asset approach to value your small business, there are a few things you need to keep in mind. First, you need to make sure that all of your assets are properly accounted for. Second, you need to determine the fair market value of each asset. This can be done by hiring an appraiser or using publicly available data. Finally, you need to calculate the net value of your assets, which is the sum of all your assets minus any liabilities. Once you have the net value of your assets, you can then use this number to value your small business.

Using Income Approach

The income approach method looks at the earnings your business generates to determine its value. It’s typically the most ideal for small business transactions. There are two ways to do this: the capitalization of earnings method and the discounted cash flow method.

The capitalization of earnings method looks at your business's current or projected earnings and assigns a multiple to them to arrive at a value. For example, if your business is earning $100,000 per year and you believe it could sell for a multiple of four, then your business would be valued at $400,000 under this method.

The discounted cash flow method is a bit more complicated, but it essentially tries to determine the present value of all the future cash flows your business will generate. This method can be helpful if your business is growing rapidly or has plans for expansion that will result in increased earnings down the road.

Applying the Market Approach

This method involves comparing your business to similar businesses that have recently been sold. By looking at factors such as the size of the business, the industry it operates in, and the location, you can get a good idea of what your business is worth.

It’s important to make sure that you are comparing apples to apples when using this approach. For example, should only compare businesses that are similar in size, scope, and operation. You also need to be aware of the current market conditions. If there has been a recent surge in demand for businesses like yours, then you can expect to receive a higher valuation. On the other hand, if the market is saturated or buyer interest is low, then your valuation will be lower. By taking these factors into account, you can get an accurate picture of what your small business is worth.

How business valuation is done by the professionals

Some business owners will hire a business broker or certified business appraiser to help with the valuation process. The broker or appraiser will prepare an appraisal report that includes an analysis of the business's financial history, current market conditions, and other factors that could affect value.

There are two benefits to using a professional to value your business: It will remove your personal bias towards valuing your own company, and it will offer you a path to evaluate serious buyers.

How Baton can help

Whether you're looking to sell your business or not, Baton can help you determine an accurate value for your business. We offer free business valuations based on real financial data from a marketplace of buyers and sellers to make sure you’re getting the most accurate and realistic value for your business. When you’re ready to take the plunge and start the selling process, we can advise and support you every step of the way, and connect you with our network of other licensed professionals to help. Get started today to discover what your business could be worth.