We often get asked ‘what’s my business worth’? At Infuse, whilst we’re great at the numbers, a business valuation comes down to a lot more than just the numbers. We look at all the things a prospective buyer would want to know.

Whether you’re actually actively looking to sell your business or add an equity owner, or are simply curious, a business appraisal/valuation is a great tool to help you make decisions and plan for the future.

Not all businesses are the same so it’s not a one size fits all in terms of the methodology used to value a business. Here’s three common methodologies used for valuing service based businesses.

  1. Earnings Multiples Method: This method assesses the business’s value based on its earnings potential. Typically, it involves calculating a multiple of the business’s earnings, such as Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), or net profit. The multiple used often depends on industry standards or comparable sales. For instance, a business might be valued at 3 times its annual EBITDA. This method is popular for service-based businesses due to its simplicity and reliance on financial performance.
  2. Market Comparison Method: This approach determines the business’s value by comparing it to similar businesses that have been sold recently. It involves researching and analyzing the sales prices of comparable businesses in the same industry and region. Factors like revenue, client base, growth potential, and market trends are considered to arrive at a valuation. While this method can be effective, finding exact comparables might be challenging for unique service-based businesses.
  3. Discounted Cash Flow (DCF) Method: DCF forecasts the business’s future cash flows and discounts them back to their present value. It involves estimating future earnings based on projected revenue, expenses, and growth rates. This method requires predicting future performance, making it more complex and reliant on accurate financial forecasts. However, it provides a detailed insight into the business’s potential worth based on future cash generation.

Among these methods, the Earnings Multiples Method is often recommended for service-based small businesses due to its simplicity and reliance on financial performance. It considers the current financial health of the business, making it easier to understand and calculate.

Remember, the choice of valuation method can vary based on the nature of your business, industry standards, and available financial data. It’s often beneficial to consult with a business valuation expert or an accountant to get a more accurate assessment tailored to your specific business circumstances.

When valuing your service-based small business, consider these methods, especially focusing on earnings multiples, to gain a clearer understanding of its worth based on financial performance and industry standards.

Do you want to know more? Please contact us to find out what your business is really worth.