If you’re a small business owner, you may ask yourself the question What Is My Business Worth and for good reason. While competing a small business valuation can take up time that may be spent on other parts of a business, a business valuation can benefit any business owner in the following ways:
- Full understanding of the parts of the business. Small business valuations can allow a small business owner to see all the parts of their business, from expenses to income, whether that is debt or payroll taxes or merchandise sold.
- Full understanding of the circumstances surrounding the business. While the business itself may be the initial focal point of a small business valuation appraisal, the circumstances must be understood before the final value appears.
Those are the two components of a small business valuation appraisal. They are typically called the standard of value and the premise of value. Both are necessary to complete a full small business valuation appraisal, which is a process of measuring business worth. Business worth isn’t absolute. It can vary over time.
The two key starting points toward completing a small business valuation are determining why you need a small business valuation and assembling all the necessary information. There are three approaches:
- By comparison to the recent sales of similar businesses.
- Based on the business’s earning power and risk assessment.
- Based on the business’s assets.
It is an economic exercise, one that requires the ability to analyze information pertaining to your business’s financial information. The key documents needed are the income statement for your business and the balance sheet. For a stronger small business valuation appraisal, those documents need to cover a three to five year period.
The income statement should contain all the ways in which your company is performing in terms of monetary value. Items on the income statement can vary according to the type of company but generally they include merchandise sold and services rendered. Looking at a three to five year period can give you a good understanding of how well the company has performed over a long period of time, which will give you an idea of projections.
The balance sheet should cover how your income is matching up with your expenses. Essentially, if your business is in the red or the black. Expenses can include employee wages, payroll taxes, bills, and debt, among many other expenses that can be a large amount of money or small.
The trickiest part of a small business valuation appraisal is the premise of value. This involves the circumstances surrounding your business and can entail many different influences. Influences on your business can include the local economy, the local market for your goods or services, and larger markets if your business has reached that far.
A company valuation is useful to understand where your small business has been and where it is going and give you information for the road ahead.