Even though big businesses and corporations are constantly in the spotlight, the vast majority of U.S. businesses are actually small businesses with less than 500 employees. There are many reasons why a small business owner may need a business valuation: to obtain a loan, to get accurate projections, to create a realistic budget or business plan, or even because the business is being sold. In every case, a business valuation analysis carried out by independent professionals is the best choice. They have access to the valuation tools needed to arrive at an accurate estimate of the actual worth of your business.
What does business valuation measure?
What is a business valuation and analysis? And what does it measure? A business appraisal or valuation is an economic exercise, that measures the worth of your business. It is however, not an absolute, and the outcome depends on the purpose for which the valuation is needed as well as the methods used.
Different methodologies – the market, income and asset approaches – measure different things.
- The market approach compares recent sales by the business with sales by similar businesses over the same time period
- The income approach is based on the earning power of the business and a risk assessment
- The asset approach bases the appraisal on the company’s assets
Can you do your own business appraisal?
While many businesses can carry out their own business appraisal valuation, an independent appraisal is always better. First of all, while small business owners wear many hats, financial analysis may not be their forte. For an accurate picture of the worth of the business, it may be best to have the valuation done by professional business appraisal services.
Secondly, an independent business valuation report carries much more weight with banks and lenders as well as potential buyers. No matter the purpose of the evaluation, it is best done by professional evaluators. They have access to valuation tools that can produce accurate results which will best serve the purpose for which they were intended. In fact, many business advisors would suggest having an appraisal done on an annual basis.
What information is needed for input into valuation tools?
The starting point for a business valuation is to pinpoint the reasons for the appraisal. The required financial information is then entered into the business valuation tools like appraisal software, for quick and accurate results.
Two key inputs required for business valuation tools are the main financial statements: the income statement and the balance sheet. Three to five years of records should be made available for the business valuation tools to produce accurate and reliable results.
Even business owners may be surprised to learn that business value is not an absolute, but depends on how it is measured and under what circumstances. In financial terminology, these are called the standard of value and the premise of value.