Published on April 4th, 2016 | by Day Trader
What You Need to Know to Stay Sane During Your Small Business Valuation
Small business valuations are essential tools in diverse economic situations, including but not limited to business liquidation, inheritance, gift taxation and divorce litigation. On the surface it may seem straightforward, but the process of business valuation can get very complicated. Learning the basics before hiring business valuation services can help the process go more smoothly, and allow you to get the most accurate value appraisal.
Before meeting with your business valuation experts, there are two things you absolutely must accomplish. The first is to determine your reason for seeking a small business valuation. While this may sound absurd, your reason for seeking valuation has a huge bearing on how your valuation expert does his or her job and the dollar amount you are quoted in the end. Business value is determined using two key elements: premise of value and standard of value. The premise of value is the set of circumstances under which the valuation is being conducted- your reason for seeking a small business valuation. Based on the established premise of value, the valuation expert will determine the value of your business using one of the several different established standards, or measures, of value. This means that small business valuations conducted for different reasons will garner different results; your business is worth a different amount being sold fully functioning on the open market than it is being liquidated.
After establishing your reason for business valuation, your second and final preparatory task will be to assemble the documentation your valuation expert will need to do his or her job. This mainly consists of your income statements and balance sheets. Ideally, these will go back three to five years. Depending on the circumstances surrounding your valuation, well-kept records can result in a higher business value, particularly if you are trying to sell your business.
Once your expert gets underway, small business valuations are dependent on a customized combination of the company’s assets, comparisons to closing prices on similar businesses sold recently, and earning power and risk assessment. The premise of value that you determined ahead of time will play a big part in informing your valuation expert’s decisions as he or she weighs the importance of each of these approaches to your unique valuation.
At the end of the day, it is important to remember that small business valuation is an exercise in economic analysis. A lot more goes into the valuation process than just the cost of your business’ tangible assets. However, your feelings do not factor in. Although you put in the years turning your start-up into a profitable small business and may put a large personal value on it, the market might not agree with you on a dollar amount. Arm yourself with knowledge and well-kept records, and leave the rest to your valuation expert- he or she will take care of the hard part.