Small business valuations are a mystery to many small business owners. They may have no idea how to value a company in a way that will be meaningful to creditors or investors. It is important to become clear on how the process works in order to truly understand the important role a professional can play in the process of small business valuations.
What is Small Business Valuation?
The process of small business valuation is essentially an exercise in economic analysis. One of the most important factors in determining the value of a company is found in the analysis of their financial information.
Business owners will need to have two key financial statements in order for the process to begin; an income statement and balance sheet. Ideally, these will be available for the past three to five years. While it is possible to perform a small business valuation with less data, investors and creditors will typically prefer to look at trends over a period of years rather than months.
Professional Small Business Valuation
It is possible for a business owner to calculate the worth of their company using a variety of small business valuation resources and software. However, it is very difficult for the owner of a company to truly provide an unbiased value of something they have spent so much time and effort creating.
The appearance of impartiality is especially important to the people for whom the small business valuations are being prepared. Investors, buyers, and creditors will all prefer an analysis from a person who does not have a vested interest in falsely putting forth an inflated value.
Depending on the ultimate purpose of the valuation there are three main approaches which can be utilized; asset based, earning potential, and market value. An asset-based approach will consider the total number of assets minus the total number of business liabilities or it will simply analyze the amount of net cash that could be recovered if all available assets were sold and outstanding liabilities repaid. The earning potential approach considers future earning potential and risk by evaluating past earnings. The market value approach evaluates the worth of a business based on sales of similar businesses in the area within a defined time period.
Small business valuation is a complex multi-approach endeavor that appears simplistic on the surface but actually requires an advanced set of skills and knowledge. Seeking out a professional in the field ensures the best approach is used for each individual business in order to give every business owner the best possible outcome.