What is a Small Business Appraisal?
Determine the value of your business.
Why do small business owners need to know the market value of their business?
Knowing the True Worth of Your Small Business or Valuing a Small Business for Sale
As a small business owner, you are intimately familiar with how rewarding owning a small business can be. When your company is your most valuable asset, knowing its actual value is crucial to successfully handling any financial event during the business lifecycle. A business valuation will help you stay informed about your financial situation by looking past your net income and providing your company’s true, most accurate worth.
Whether your small business is looking to sell, report taxes to the IRS, secure investment, or prepare for any other significant financial event, business valuations will provide the tools you need to confidently navigate any scenario and make the most informed decisions possible.
Learn more about business valuations with our guide on valuing a business.
When Does Your Small Business Need a Valuation?
Throughout your small business’s lifecycle, you will encounter several critical financial events. Whatever event you have experienced or expect to encounter, a small business valuation will support and guide your business decisions, knowing the value of your business.
You may need a small business valuation in these scenarios:
- Financial Reporting
- Purchase Price Allocation
- Needing a cash flow analysis
- Estate Planning and Gift Tax
- Exit Planning
- Family buyout
- Buying a Small Business
- Capital Raise or SBA Loan
- Unsolicited Offer to Buy Your Company
- Divorce Proceedings
- Value Future Profitability
- Buying or Selling Your Business
- Tax Reporting to the IRS
- Ownership Disputes
- Securing Investment
Are you planning to sell your small business? Please read our article on obtaining a business valuation before you sell your business.
What Valuation Methods are Used for Small Businesses?
There are many different methods of valuing your business. The asset approach, the market approach, and the discounted cash flow approach are all standard methods that are also well suited to valuing small businesses. Learning about how we may value your business will help you stay informed and knowledgeable about the business valuation process.
Please read our article on buying a small business: what you need to know about the different business valuation methods.
Asset Approach
The most straightforward way to value your business is through the assets-based method, which determines the value of your tangible and intangible assets minus your liabilities.
Our business valuators will analyze every asset to the smallest detail and calculate intangible assets, or goodwill, which refers to non-numerical values like reputation and trademarks. By calculating the value of your small business’s tangible and intangible assets, business valuators can create a strong picture of your business’s true worth, not just its book value or net asset value.
Learn what goodwill, or intangible assets, means for the true value of your small business.
Market Approach
This business valuation approach is like how the value of houses is calculated: by comparing your small business to other comparable companies or similar businesses of like size, location, market share, growth prospects, and total market value. We compare your market capitalization to that of your peers. Retail businesses can be difficult to value; however, we have 20+ years of experience valuing retail companies.
With this method, your small business will have the opportunity to be compared to other small businesses of similar standing, making this method well-suited to small businesses. Moreover, this method comes especially in handy for potential buyers if you are looking to buy or sell a small business in a particular market.
Discounted Cash Flow Method Approach
Often considered the most accurate business valuation method, the discounted cash flow (DCF) approach is popular for small businesses. This method calculates a company’s current value based on future earnings, future cash flow, and its projected growth rate. As a business valuation firm, cash flow analysis is critical to understanding your business’s value.
This method will also demonstrate an investor’s expected rate of return and amount of equity received. Because this method involves potential investment outcomes while calculating value, investors often prefer it, especially those looking to invest in small businesses. Buyers of your business are buying it for its cash flow. Cash flow determines what a business is worth to a potential business owner.
The computation uses earnings before interest, taxes, depreciation, and amortization (EBITDA). It can also use seller discretionary earnings (SDE). One of the two earnings methods will be used to determine a business’s value.
Keep learning about the different valuation methods suited to small businesses with our article on the different methods used to evaluate your small business worth.
What Information Does Your Small Business Need for a Business Valuation?
If your small business seeks a business valuation, the following information will be needed to assess its value accurately.
- Business’s balance sheet financial statements
- Income statement showing net profit
- Tax returns showing taxable income
- List of tangible assets
- Cash flow forecast and growth potential
- Owner’s salary and compensation package or seller’s discretionary earnings
- Business plan, if available
- Seller Discretionary Earnings (SDE)
- Accounts payable aging
- Accounts receivable aging
- DNB or business credit report
- Customer base makeup and market growth forecast
- Supplier relationships and concentrations
- Equipment list, list of assets, and any needed capital expenditures
- Any business owner’s personal assets that are not part of the business
- Any real estate holdings
- Depreciation tables
- Extraordinary or one-time business expenses
- All debt, loans, and business liabilities
- Stockholders’ agreements
- Trademarks and intellectual property (IP)
- Any pertinent tangible and intangible assets
Learn more about the benefits of a business valuation in our article about the top 7 benefits of getting a business valuation.
The Importance of Your Balance Sheet
I want to take a moment to discuss an essential aspect of your financial health—your balance sheet—and its significance in valuing your business and securing funding.
First and foremost, the balance sheet offers a snapshot of your company’s financial position at a specific point in time. It lists your assets, liabilities, and equity, clearly showing what you own versus what you owe.
This fundamental financial statement is invaluable for several reasons, including:
1. Valuation Insight: Potential investors or acquirers will closely examine our balance sheet when valuing our business. A strong asset base can enhance your valuation, while a manageable level of liabilities assures them of your financial stability. Being transparent about your financial position builds trust and highlights our hard work and diligent management.
2. Borrowing Power: Your balance sheet plays a crucial role when you approach lending institutions for financing. Before approving loans, lenders often assess your debt-to-equity ratio, liquidity, and overall asset management. A robust balance sheet indicates you are in a sound position to take on additional debt, typically leading to more favorable borrowing terms.
3. Strategic Decision-Making: Regularly reviewing and analyzing your balance sheet empowers your team to make informed decisions. It can reveal trends over time, such as increases in assets or decreases in liabilities, guiding us as we strategize for growth or cost reduction.
Your balance Sheet is Not Just Stagnant Numbers
Your balance sheet is not just a set of numbers; it reflects your business’s story. It communicates your strengths and helps us identify areas for improvement. By maintaining a strong balance sheet, you position yourself favorably for valuation discussions and borrowing opportunities.
Small business owners pay too much attention to their P&L and, often, zero attention to their balance sheet. Remember, borrowing money and valuing companies are balance sheet-driven. Reconcile your balance sheet monthly or at least every quarter to get a true picture of your business.
When it’s time to sell your business, the quality of your balance sheet is paramount.
How Much Should a Small Business Appraisal Cost?
When you pursue a professional business valuation for your small business, you acquire your true value strategically, holistically, and thoroughly. This complex and nuanced process can cost anywhere from $2,900 to $8,9000, depending on your unique, individual scenario.
A business broker can give you a back-of-the-napkin valuation for what your business is worth. Still, buyers and their lenders will not consider the value of a business number credible from a business broker.
Do you have more questions about how much a small business appraisal should cost? Read our decision tree on how much a business valuation should cost and familiarize yourself with different scenarios and their resulting potential valuation costs.
Is The Cost of a Business Valuation Worth It?
Many small businesses looking to save money and cut costs might consider using online tools and calculators that claim to value your business. However, these online tools do not come anywhere near receiving a professional business valuation and can never represent the actual value of your business.
The IRS, banks, and courts will also not consider a small business valuation done through an online tool legitimate. Your business value must be acquired through a certified business valuation professional to be considered credible.
There is so much more to a business valuation than just inputting numbers and getting a number back. Business valuation is not a science but an art, and our expert business valuators will investigate every aspect of your business to provide the most accurate value possible. Additionally, knowing your business’s true value is invaluable, and it is easy to see the worth of a legitimate, professional business valuation.
Learn more about how to value your business to understand your business’s value.
Business Appraisals for Small Businesses
Your business is your most valuable asset. For over two decades, business owners have trusted the certified valuation professionals at BA FA|GA|HI, and your business’s market value is safe with us. Reach out today for a confidential conversation about your financial situation and what we can do for you if you are preparing to sell your business.
No matter your business valuation reason, contact BA FL|GA|HI today for a free, confidential consultation with our valuation experts about valuing your business.
We’ll discuss your situation, the valuation process, the valuation methods, a sample business valuation, whether our business appraisal services are right for you, and your exit strategy.