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If you're looking for investors or want to sell your business, you must determine its value. Follow these four steps to calculate it.
Most entrepreneurs put their hearts into their businesses; but, when it comes to putting a price tag on all that effort, nearly 98 percent of small business owners have no idea what their company is actually worth. Whether launching a venture or running a thriving operation, every owner faces that pivotal moment when knowing their real value is non-negotiable. Yet for those without a strong financial background or an expert finance team, the thought of “business valuation” can feel overwhelming.
This guide breaks down why valuation matters and walks you through a simple, four-step process to confidently estimate what your business is really worth.
Business valuation is the process of determining the economic worth of a business. This figure is critical when selling, attracting investors, planning succession, negotiating loans or resolving legal disputes. A business valuation is a powerful tool for owners, but only if it’s accurate and up-to-date.
“If you overestimate the value, you’ll scare your buyers away. If you underestimate it, you’ll leave money on the table,” said Mike Blake, founder of High Score Strategies (HSS). “But more important than the number itself is why the value is what it is. This empowers you to take action to increase the value and to negotiate with greater authority.”
If business owners cannot demonstrate their company’s worth, it becomes challenging for outsiders to determine a reasonable investment or purchase offer. It’s wise to know a business’s value before critical moments arise, such as selling, seeking capital or planning an exit.
“Whether you’re chasing funding, making deals, mapping growth or taking stock of your financial position, a solid valuation hands you both leverage and clarity,” said Holly Andrews, managing director of finance broker KIS Finance. “These prove invaluable as you expand or navigate key decisions.”
A variety of business valuation methods exist, but most fall into three primary approaches.
Method | Best For | Data Needed | Pros | Cons |
---|---|---|---|---|
Income (DCF, Cap Earnings) | Profitable businesses, reliable cash flow | Projected cash flows, financials | Future-oriented, factors in growth | Requires accurate projections |
Market (Comps, Precedent) | Well-established industries, sales data | Comparable sales, multiples | Real-world comparison, quick estimate | Limited private sale data |
Asset-Based | Asset-heavy, low/no profit companies | Assets and liabilities | Hard value “floor,” simple logic | Ignores intangibles, undervalues growth |
Income approaches are best for profitable, stable, ongoing businesses. However, they’re data and projection-intensive.
If the result exceeds the required investment, it signals potential value.
Market methods offer realistic comparisons but require public sales data, which is often hard to find for small private firms.
Asset-based methods work well with tangible assets but undervalue businesses built on brand, technology or growth potential.
Pricing a business for sale involves more than calculation. The following steps need to be taken before selling your business.
Technology, digital platforms, and professional services offer business owners many ways to execute valuations:
Skye Schooley and Jennifer Dublino contributed to this article. Some source interviews were conducted for a previous version of this article.