How to Value a Small Business Correctly

Preparing your small business for sale can be a long process, however, there are some key points to take into consideration when determining the value of your small business.

From analysing the existing customer base and client contacts to valuing stock and assets, a small business can have many key components.

Here is our rundown on valuing a small business…

Conducting Market Analysis

A thorough understanding of the market and industry in which the small business operates is essential when assessing its value. Conducting a comprehensive market analysis helps identify the target audience, competition, and potential growth opportunities. Examining industry trends, market saturation, and potential disruptors can provide valuable insights into the business's future prospects and its competitive advantage.

A business that operates in a growing market with few competitors is generally valued higher than one facing intense competition or a declining market and understandably so – a business with a company with a better position in the market has a wider scope for growth in the near future.

Valuing Assets & Stock

Does your small business have stock that comes with it, or assets or intellectual property? All of these aspects are very important when it comes to valuing a business. For example, an e-commerce business may dropship their stock, therefore, they don’t have any specific stock in their possession. Whereas a retail store with a physical premises, may have stock that is worth a substantial amount – sometimes this can even double the valuation of a business.

Evaluating the quality, quantity, and market value of these assets helps determine the business's overall value.

Customer Base and Relationships

The strength and loyalty of a small business's customer base are significant determinants of its value. A large and diverse customer base, with a high rate of customer retention, indicates stability and growth potential.

Analysing customer acquisition and retention strategies, customer satisfaction levels, and the business's reputation in the market helps determine the value of its customer relationships. A solid and loyal customer base can contribute to future revenue streams and reduce risks associated with customer attrition – this includes online reviews, awards, ratings (such as hygiene ratings) and more.