Hindsight is 20/20, but in the case of your mistaken business investment, you needed more than a better vision, you needed a better product, a better location, and a better pricing system. In fact, the decision to go into your business adventure without a complete understanding of the available business valuation tools was a very unwise decision.
Fortunately, you have been able to salvage some assets from this failed attempt at your first business adventure, and you hope to take what you have learned and make a new start before long. Company valuations are never an exact science, but with a better understanding of the small business valuation resources both new and unexperienced investors can make more informed decisions.
Business Valuation Tools Serve as an Informative Way to Approach Investing in a New Business Opportunity
Whether you are in the process of buying or selling a business, understanding the resources that are available to you can help you find a more accurate way to understand the value of a business. The business valuation process is largely an exercise in economic analysis. For this reason it should come as no surprise that the company financial information provides key inputs into the entire process.
In almost all valuation methods, the two main financial statements needed for business appraisals are the balance sheet and the income statement. In fact, to achieve a proper job of valuing a small business, it is important to have three to five years of historic income statements and balance sheets available. Using this information investors and sellers can start the process of determining both asking and selling prices.
Other key key starting points in establishing a business worth include:
- Determining why you need business valuation.
- Assembling all the required information.
With these two points determined, the investor or buyer can then find an institution or a computer program that can help measure the business valuation. Typically, the evaluation process then follows one of three approaches:
- Comparison made to recent sales of similar businesses. Sometimes the similarity is found in number of employees, locations, products or services sold, or a combination of these and other factors.
- Determinations based on the earning power and risk assessment of a business.
- Determinations based on the assets of the company.