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How can you value a small business?

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If you are looking to invest in a small business you have heard about valuation of a small business. For those that are new to small business investing, this article will help you to understand how to value a small business and to make sure you are getting the right type of investment for the company. Are you interested in become a part owner of the company or would you like to invest in it simply for the profits it will make? You need to evaluate yourself and what type of investor you would like to be in order to make a correct decision when you are trying to understand the value of a small business.

Profitability
One of the first things you must do is to look at how profitable the business will be. How much money has it been able to make so far? Does it seem like a strong industry and a good product? Take the net profit and total income to come up with the ratio of profits for the company to get a actual number to base your decision on. You do need to remember to look at turnover costs before the net profit costs as this can give you an indication of issues in the company. The profitability factor will be able to help you determine if the business is a good investment or not.

Sales
Take a look at the profits and sales for the company to get a good idea as to where the company has come from and where it is going in the future. You need to look for a small business that comes with positive numbers here in order to justify your investment. If it has negative numbers, you are taking a big risk and it could end up backfiring on you big time.

Liquidation Value
This will help you to see the money the company will be worth when you sell off the assets for the company. Once you sell the assets and repay the debts that are owed, you will get this number and it will help you to see if this is a worthy investment or not. Keep in mind where the assets are coming from and if some of them are still tied into the small business owner's personal estate.

Comparison
How does this company compare to others? You need to really look at the details and to see if this company has what it takes to become a success and to provide you with all of the things you are looking for. You need to compare the business to others in order to find out if you will make a good profit from the company or if it looks like you should invest your money into another small business that does have the performance numbers you need.

Balance Sheet
Look at the balance sheet to see the financial strength of the company. It helps you to see the assets and liabilities along with where the money is coming from. Ask to see at least 3 years worth of financial data before making your decision on the investment in a small business.

Business Plan
Ask to see the business plan and look for updates to the plan. This will show a good investment from a poor one as you need to seek out a company that does take the time to update their information and focuses on really moving forward with the company and staying organized. This is a great way to determine if you will be able to have a solid return on your investment in this small business or not.

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