What’s Different about Valuing Small Businesses?

Fundamentally, valuing a small business works the same way as valuing a large one. Generally, it’s less complex. However, there are a few things that make the valuation more challenging and that you need to know.

Why is the Valuation less Complex?

Size and diversification: small businesses have fewer business units, subsidiaries, and geographic markets in which they operate. There’s less to consider, which reduces complexity.

Capital structure: While large companies typically have a more complex capital structure with various types of debt and equity, including preferred stocks, convertible bonds, and other financial instruments, the capital structure in a small business is much simpler. The valuation doesn’t need to consider the effects of different forms of financing.

Lack of Availability of Financial Information

Depending on how disclosure requirements are regulated in the country, even smaller companies, depending on their legal form, may have to publish their business results. However, in general, there is significantly less publicly available information for small businesses. Large companies often receive extensive coverage from financial analysts, which can support a valuation. Small businesses have little or no such coverage.

How Easily Can a Share be Sold?

Shares of large companies are generally more liquid and easier to trade, which makes it easier to determine their market value. Shares in small businesses, especially minority stakes, are difficult to trade, which makes valuation more complex.

What are Small Firms more Vulnerable to?

Small businesses are more vulnerable to market fluctuations, competitive pressures, and management errors than large companies. This makes them more susceptible to risk. This must be taken into account in the valuation.

What about Transferability to a Successor and Management Quality?

How dependent is the company on the owner? A high dependency negatively affects the valuation. The quality of management also has a greater influence on the company value in small businesses. The skill and experience of the management are crucial factors, and it must be ensured that the management supports a change of ownership and remains with the company for at least a certain period of time.

Market Dynamics and Adaptability

If small businesses operate in niche markets that change faster and are more volatile than the markets of large companies, this requires a careful analysis of market dynamics. Does the company have the resources to adapt quickly to changing markets?

Which Valuation Methods are Suitable for Small Businesses?

Nimbo publishes current multiples for small businesses in various industries in numerous countries on its website monthly. This also offers the possibility for small businesses to value their company using the market value method. Other common valuation methods for small businesses are the earnings value method or the asset value method.

Do You Need further Information?

Is this topic relevant to you? The Nimbo Guide offers you more in-depth information.