If you are one of 26.5 million businesses in the U.S. or you hope to become the owner of one, before enlisting a business valuation firm, it is important to gather all the necessary information and also to be clear on the reason for needing an evaluation at this time. There are a number of reasons to enlist business appraisal services to conduct a thorough assessment of a company’s value:
- Retirement
- Settling an estate
- Son, daughter or grandchild taking over business
- Legal dispute
- Buyout
- Divorce
- Purchase
- Appraisal for divorce
- Buyout by one of the partners
- New business partner
- Sale
All parties are interested in obtaining an accurate measure of the worth of the company. Given the complexities of the business world, this seems like a simple task, but there are a number of factors that determine the business worth and of the three methods to determine worth, a valuation market approach is the most thorough and accurate.
To understand why a valuation market approach is the most desirable, an understanding of the other two types is necessary.
Asset Approach
This method of business valuation is the simplest to understand. Tabulate the value of all the structures, equipment, inventory, furniture, and vehicles, minus depreciation. Add any patents or intellectual property, and that provides one fairly straightforward way to look a company’s worth.
Income Approach
Another business valuation report, the income approach, is a bit more complicated. This company valuation tool looks to calculate a company’s future revenue and account for depreciation. Stock brokers use this more complicated method to calculate business worth.
Market Value Approach
The primary difference in this approach is that it involves comparing your company’s recent sales to the sales of similar companies. For this method to be successful, it is important to consider the geographical location of the companies being compared as well as the length of time in months or years from the given data points and to account for changes in the market at various times. Accounting policies at the comparable companies is also an important consideration when determining the validity of the data.
Considering that 543,000 business are started each month, determining the value of a business is a constantly changing landscape. For this reason, a reliable small business evaluation tool or firm is incredibly helpful whether you are looking to buy or sell a small or large business.
