# How to evaluate the value of a small business?

How to evaluate the value of a small business?

To give an example, if i have numbers as such

``````Cash Flow : \$50,000
Debt : \$10,000

Inventory & Assest : \$5000
Account Receivable : \$5000

Operation Cost : \$10,000
``````

What is the formula to calculate the approximate value of the business ?

The "book" value would be assets minus the liabilities, which would be zero from an accounting standpoint. However, that assumes that all receivables are recoverable, which may not be realistic, so there might be a slight discount.

From a "going concern" standpoint, you'd look at the present value of future cashflows. Not necessarily profit, but cash flows. So if the cash flow you list is the total net cash flow (not just revenue or net profit), then you would calculate the present value of all future cash flows, incorporating an appropriate discount factor indicating the rate of return you expect for an investment and any future growth or decline in cashflows.

The formula for an endless series of future cash flows, with a discount rate `r` , cash flow of D after the first year, and annual growth `g` (both expressed as a decimal percentage) is

``````         D
PV =  -------
r - g
``````
• Thanks , I meant the cashflow as in general. It might not be profit. Just total net cash flow – goofyui Dec 3 '17 at 5:03