Reasons You Might Need an Accurate Company Valuation

Business valuation

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.

Insurance purposes

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.

Performing a Small Business Valuation Steps

Business valuation tool

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.