Owning a small business isn’t like owning stock in a publicly traded company. With stocks, you can always calculate the market value of the entire business just by multiplying the market price of the stock by the number of outstanding shares. However, small-business valuation can be tricky, and you’ll need to take into account factors like revenue, cash flow, and future growth estimates in order to put a reasonable dollar figure on a business. Depending on the industry and the level of risk, valuations can vary greatly from business to business, but here’s a closer look at what you’ll need to know to get started.
1. Know what your business earns.
The first step to valuation is to understand how profitable your business is. In some industries, revenue is more important than net income, but the proof of a business is whether it can make money.
However, some accounting practices can obscure true profit. Items like depreciation and amortization reflect reductions in value of business assets, but they don’t always match up perfectly with the true deterioration in the usefulness of such assets. Similarly, taxes can vary greatly from year to year based on available tax breaks. In order to make it easier to evaluate, many valuation methods start with earnings before interest on debt, taxes, depreciation, or amortization — also known as EBITDA.
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