Four Reasons, Besides Selling, that you Might Need a Business Valuation

Comparables valuation

You don?t plan on selling your business anytime soon. In fact, you are still growing your business and you are excited to see where it will go and how large you can make it. Why then, do you need a business valuation report? Isn?t a business valuation report primarily for selling your business? Not always. Business owners go through the process of a full business valuation analysis for the following reasons.

To create a growth business plan

If your business plan is to grow 50% or even 100% within the next two years, what are you measuring your growth success on? It can be difficult to measure results, without first getting a business valuation report. The information from the business valuation report will give you a starting number that you can base future business growth results on. You can also use this information later on if you do decide to sell, to show how quickly you were able to grow. A solid business plan is one that shows hard numbers and comparisons and a business valuation report can help you do just that.

To obtain financing

Many business owners rely on financing to expand a business. However, you will find that most banks or lenders are not willing to give you funding unless you can prove your business success. You will need a strong business valuation calculation to prove your worthiness of funding. When you apply for financing, you will be required to provide specific documents. Creating a business valuation report requires many of these same documents, so you will already have access to them. Business valuation is actually a largely economic analysis exercise. The company financial information provides key inputs into the entire process. The two main financial statements you will need are the income statement and the balance sheet. To do a proper job of valuing your small business, you should have about 3 to 5 years of historic income statements and balance sheets available.

To understand business growth struggles

Many small businesses will face a number of struggles, especially in the first couple of years of business. There are few methods for overcoming these struggles and for preventing them from failing the business. One of these is by doing a competitive analysis. Look at your competitor?s success and compare it to your own. What are you doing the same? What are you doing differently? Can you take any of their methods and apply it to your business to overcome the struggle?

When you use business appraisal services, you can get an even better idea of how well your business is doing when compared to your competitor. You can often determine the value of your business by using these three approaches, by comparison to recent sales of similar businesses, based on the businesses earning power and risk assessment, and based on the company?s assets. Specifically looking at the comparison of recent sales of similar businesses, you can accurately gauge your current business worth.

Important factors that might influence your business valuation report

It is important to understand, however, that there are many factors that can influence your business valuation report. The specific comps valuation method or business valuation resources used can affect the outcome. Additionally, it might seem surprising at first that the valuation results are influenced by your need for the valuation, but business value is not absolute. It is a process of measuring business worth, which depends on two main key elements, how you measure business value and under what circumstance. In formal terms, these elements are known as the standard of value and the premise of value.

While the majority of business valuation reports are obtained with the intent of selling the business, there are also many other reasons that a business might order a report. Determining the business valuation number of your business can help with your business growth, allow you to compare to competitors, and give you insight into current growth struggles as a business.

When It Comes Time To Sell Your Business, Get a Professional Valuation

Small business valuation calculator

If you own your own business, you will likely need to consider selling it at some point. You will retire at some point, and you could need to sell before then because of financial hardship, illness or another reason. Even if you are just selling the business to an employee or a relative, you need to know what it is worth so you can be fairly compensated. To get an accurate business valuation, you may need to avail yourself of business valuation services.

What your business is truly worth may be more or less than what you believe it to be. If you have an inflated opinion of your business valuation, you may set the price way too high and not be able to sell it. If you think your business is worth less than what it really is, then you could wind up leaving money on the table. Neither of these situations is ideal, and they can be avoided by using the expertise of business evaluation services to get small business valuations.

When looking to value your business, a valuation professional is likely to take one of three approaches. He or she might use comparable sales of other businesses, take the value of the assets or look at the potential for future sales and weigh it against the risks. In some situations, your valuation professional may use a combination of two or more of the factors to come up with a price. What type of business you have can influence what method to use as well. For example, for an online service business, it would make much more sense to use a valuation income approach to look at prospects for sales. On the other hand, a manufacturing business with lots of expensive machinery may be better off being valued based on its assets.

At a minimum, you can expect to need to show your valuation expert about three to five years worth of balance sheets and income statements. You might also be asked for client lists, an inventory of intellectual property and other documentation that might show the worth of intangible assets.

Keep in mind that selling your business is more of an art than it is a science. Even if you have a firm grasp on assets and sales, it still comes down to whether you can find an interested buyer, and you may have to decide whether you want to get your business sold for less than you expected or hold out for a certain price while facing the risk of not selling your business at all. For more information see this.