What is a Business Valuation and Why It Matters - How to Value a Small Business

If you’ve ever asked yourself, “What is my business worth?”, you’re not alone. Whether you’re preparing to sell, seeking investors, resolving a legal matter, or planning for retirement, a business valuation—sometimes called a business appraisal—is the essential step in determining the fair market value of a business.

What is a Business Valuation?

In simple terms, a business valuation is the process of estimating the economic value of a company. It answers critical questions such as:

• How much is my business worth today?

• How do I value my business to sell?

• What is the right price for my company in the market?

Let’s break down why it’s important, how it’s done, and the situations where getting an accurate business valuation can make a big difference.

Why Business Valuation Matters

Knowing your company’s value isn’t just about selling—it’s about making informed decisions at every stage of your business journey. Common reasons include:

1. Selling Your Business – A small business valuation helps you set a fair asking price, negotiate confidently, and avoid leaving money on the table.

2. Securing Financing – Lenders, including the SBA, often require an SBA business valuation for loan approval.

3. Ownership Changes – For partner buyouts, mergers, or acquisitions, an accurate valuation ensures fairness for all parties.

4. Legal and Tax Purposes – Divorce settlements, estate planning business valuation, or IRS compliance often require a certified business valuation.

5. Strategic Planning – Understanding your value helps guide growth strategies, risk management, and succession planning.

How Does a Business Valuation Work?

Professional, credentialed valuation experts (e.g., CBAs and CVAs) use a mix of financial analysis, industry benchmarks, and market research to determine your business’s worth. This process can include:

• Reviewing financial statements and tax returns

• Analyzing historical and projected cash flow

• Assessing market conditions and industry trends

• Adjusting for unique factors like goodwill, customer base, and brand reputation

Common Business Valuation Methods

There’s no single “best” way to value a business—different methods work for different industries and situations:

1. Income-Based Approaches

   • Discounted Cash Flow (DCF) business valuation – Estimates future cash flows and discounts them to present value.

   • SDE business valuation – Common for small businesses, based on Seller’s Discretionary Earnings.

   • EBITDA valuation method – Often used for larger companies or when comparing across industries.

2. Market-Based Approaches

   • Market-based business valuation – Compares recent sales of similar businesses.

   • Multiple of earnings valuation – Applies an industry-specific multiple to your profits.

3. Asset-Based Approaches

   • Asset-based business valuation – Calculates the value of assets minus liabilities, especially for asset-heavy businesses.

Valuation by Business Type

Different industries have unique factors that affect value. For example:

• Retail business valuation – Inventory turnover, location, and foot traffic matter most.

• How to value a service business – Customer contracts and recurring revenue are key.

• E-commerce business valuation – Website traffic, conversion rates, and fulfillment processes are critical.

• Auto repair shop valuation – Equipment condition, customer loyalty, and technician skill level are considered.

What Affects Business Value?

Factors that influence how much your business is worth include:

• Revenue trends and profitability

• Market demand and competition

• Customer concentration risk

• Brand reputation and goodwill

• Condition and age of assets

• Owner dependency (how much the business relies on you)

Steps to Value Your Business Before Selling

If you’re thinking about selling, follow these steps:

1. Organize Financial Records – Have at least 3 years of accurate statements ready.

2. Remove Non-Business Expenses – Clarify true profitability.

3. Evaluate Assets – From equipment to intellectual property.

4. Hire a Professional – A certified business valuation expert or professional business appraiser such as a Certified Business Appraiser will provide an objective, defensible report.

How to Get a Professional Business Appraisal

You can start with online tools to get a ballpark figure, but how accurate are online business valuation tools? Usually, not very. They can’t account for unique factors that impact value.

For important decisions—especially selling your company or resolving legal matters—work with an accredited business valuation firm. They’ll prepare a business valuation report that stands up to scrutiny from buyers, banks, courts, or the IRS.

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Understanding your company’s worth isn’t just a “selling” question—it’s a strategic advantage. Whether you’re planning an exit, navigating a life event, or simply curious about how to value a small business, getting a certified business valuation puts you in control of your financial future. See Business Valuation Solutions' pricing.

Ready to find out what your business is worth? Contact a local business valuation expert or Business Valuation Solutions today and take the first step toward clarity and confidence.