Small business valuations can be tricky to figure out. There are several ways to determine value. The best way to determine the value of a business is heavily influenced by why the valuation is needed. For example, determining value for a business loan is significantly different than determining value for a potential investor.
Overall, determining small business valuations is an economic analysis exercise. Obviously, the company?s financial records play a key role in the process. The income statement and the balance sheet are the two primary documents needed for this as they provide a picture of the company?s financial health and growth.
To get the most accurate picture, three to five years? worth of income statements and balance sheets are needed, if that many are available. Newer businesses may rely on income potential and growth, which is an unstable predictor, but often used when approaching potential investors.
The three basic ways of determining small business valuations is by comparison to recent sales of similar businesses, based on the business? earning potential and risk assessment, and based on the company?s assets. there are business valuation services that can determine the valuation for a business. This eliminates the need to research how and then attempt to figure things out accurately without any formal training.
There is also small business valuation software that can help.Much like other forms of accounting software, you just need to have all the information and then enter it when prompted.
Typically, lenders look at company assets when determining the valuation for the purpose of a loan while investors will look at earning potential, risk assessment, and possible success of similar businesses.
One thing to keep in mind is that business valuation is not absolute. A valuation is a process of measuring based on standard of value and premise of value. The standard is how you measure the value and the premise is under what circumstances you measure the value.
The most important thing to keep in mind is to have all the numbers correct and committed before approaching a bank or investor. Not knowing the numbers comes off as unprofessional. Likewise, creating a non-traditional valuation that doesn’t quite make sense or is highly inflated also comes off as unprofessional.