When you are self employed, it can be difficult to accurately establish the value of your business. It is much different than working at a salaried position, where you are provided with detailed W2s. When you are the business owner, you cannot simply take into account the total income of the business. You have to also account for things like costs, rent and utilities, product development, marketing, employee wages and benefits, and even expected losses. However, it is important to have an accurate company valuation for many reasons.
To obtain lending
If your business requires additional capital for expenses or to expand the business, you will have to apply for a loan. When you apply for a small business loan, the bank requires specific information about the business, including its business valuation appraisal. If you are unsure about calculating the worth of my business, you may not have the necessary information to obtain a loan and may need to create an evaluation.
Business valuation is largely an economic analysis exercise. Not surprisingly, the company financial information provides key inputs into the process. The two main financial statements you need for business valuation are the income statement and the balance sheet. To do a proper job of valuing a small business, you should have 3 to 5 years of historic income statements and balance sheets available. These small business valuation resources may be especially helpful if you are wondering the best process for calculating the worth of my business.
To sell the business
Perhaps you are ready to move onto other business ventures or you want to retire. Either way, you will need an accurate business valuation of your company to sell it. Buyers will not even consider buying your business if you have never been involved in calculating the worth of my business. The business valuation with the intent to sell may be a little different than the valuation used to obtain lending.
It may seem surprising at first that the valuation results are influenced by your need for business valuation, but business value is not absolute. It is a process of measuring business worth, which depends on two key elements, how you measure business value and under what circumstances. In formal terms, these elements are known as the standard of value and the premise of value. Simply put, your reason for sale will factor into calculating my business worth. If you are selling because you no longer have time to run the business, yet it is profitable, you are likely to receive more. However, if you are losing money and cannot afford to keep the afloat, this will also be taken into consideration.
You may also be tasked with calculating the worth of my business for insurance purposes. Your insurance policy needs to align with the type of business you do and the amount of customers you service. Small business valuations can help an insurance provider understand your insurance needs. Small businesses involved in more dangerous of working conditions, such as construction companies or electrical workers may require higher amounts of insurance. The business valuation gives them a better idea of the needs of the company.
To go public
Gaining IPO status is a goal among many medium sized businesses. When you trade publically, you are opening up your business to endless growth opportunities. There is a lengthy and complex process involved with going public. One of the most important steps is calculating and publishing the true value and evaluation of the business. You can determine the value of your business using these three approaches, by comparison to recent sales of similar businesses, based on the business? earning power and risk assessment, and based on the company?s assets. All of these factors are likely to be taken into account when attempting to go public.
There are many reasons that you may need to calculate an accurate business valuation. A few of the most common reasons include obtaining lending, purchasing an insurance policy on the business, selling the company, or going public in the IPO market. Ensure that you have the necessary documents and that you are using the right method of valuation for your business.