Regardless of the reason, you should consider having your small business’ market worth evaluated. Getting a small business appraisal or small business valuation can be critical to final business success.
Prepare your business for a business appraisal
Table of contents
- How to Value a Small Business
- What is Small Business Value?
- Small Business Valuation Steps
- Why a Small Business Valuation?
- What about an online business valuation calculator?
- Small Business Valuation Methods
- Small Business Appraisal Conclusion:
What is Small Business Value?
Small Business Valuation Steps
Operating a small business can be extremely rewarding. For some individuals, doing so represents the opportunity to create an enterprise with growth potential. For others, it reflects the chance to build a valuable asset for themselves and generations to follow.
Your business is probably worth the present value of your future cash flows or the discounted cash flow method. We are happy to walk you through the valuation process.
Whatever your reason for launching a business venture, you should remember that your business will go through many stages as it progresses through its own lifecycle. Your role as a small business owner, therefore, will vary depending on the specific financing event that your business is experiencing. Regardless of such an event, however, you should consider having your business’ market worth evaluated and review the steps to maximize value.
Why a Small Business Valuation?
For example, some small business owners may be seeking capital to help their enterprise expand. Other owners may be interested in getting your company ready for a potential sale. Still, others may be interested in financing retirement or an additional enterprise. Knowing the true value of your business will help ensure that you have the confidence needed to make the most appropriate decisions for your company and business portfolio.
Before learning how a proper business appraisal occurs, you must understand what valuation entails. A business valuation conveys the current economic worth of an enterprise.
What about an online business valuation calculator?
In most ways, you get what you pay for, and a free online or under $100 online business valuation calculators are a fun toy, but do not give you a number that a buyer will take seriously or a bank will loan money against. Unlike home sales, the comparables must be researched, and home sales don’t have a business model, market share, net income, income statement, or balance sheet.
A business broker might use one of the online appraisal calculators to determine your company’s value before going to market. An investment banker will spend the money on a business valuation with market research.
Small Business Valuation Methods
The small business valuation methods used to conduct the appraisal may vary among evaluators and industries. But the factors included in such an analysis remain the same. Often, the financial health of a business is assessed by considering its team, assets, earnings, growth, and losses within the context of the firm’s specific industry.
You can also read the different methods used to evaluate your small business’s worth.
Regardless, it is helpful for small business owners to understand the common methods and why outcomes will differ with each valuation method. It is helpful to speak to expert valuators, like those at BA FL|GA|HI, when determining which business appraisal service best suits your situation.
Here are a few things you should know about business valuations before you seek one out for your small business.
1. Make sure your business finances are in order.
It will be easier to consult a professional appraiser like BA FL|GA|HI when conducting a small business valuation if you strive to have your financial information in order. This will be especially helpful if you seek to transfer business ownership between yourself and a potential buyer.
As a seller, you will need to provide the following documents to ensure an effective valuation occurs:
Documents Needed for a Business Appraisal
- Tax filings and returns
- Company’s sales and client type breakdown
- Overview of your business plan or personal finances
- A list of your tangible and intangible assets
- Financial Statements including:
- Profit and loss statements for the last few years and YTD
- Balance sheets for the last few years and YTD
- Business loans, interest rates, and notes
- Owner’s salary, benefits, and perks
- Business future cash flow forecast
- Seller’s discretionary earnings
- Licenses, deeds, and any propriety documents
A potential buyer interested in acquiring your small business may also independently obtain a valuation to assess your firm’s true worth or fair market value. The potential buyers will not be required to provide as many documents. But they will still have to provide some insight into their own financial history. As a seller, you should aim to review a potential buyer’s credit report and financial profile.
Regardless, conducting an in-depth review of the financial information of each party involved will contribute to a more effective and accurate company valuation or appraisal.
Are you a potential business buyer? You can also read our article on how to buy a business.
2. Take stock of your assets.
There are many ways to assess the value of your enterprise. One approach involves considering the assets that comprise your firm. Although imperfect, this method calculates a business’s value by considering the company’s total assets and liabilities.
To begin, make a list of everything the business owns. It is important to note, however, that there are two asset categories, and they are weighted differently when determining a business’s total value.
- Tangible assets include physical items like machinery, property, and raw materials. These types of assets can also include real estate, property, liquidated cash, and inventory.
- Intangible assets, on the other hand, would include non-material assets that amplify your business’ value. This asset class may include patents, intellectual property, customer loyalty, or trademarks.
Once you have made a list of each asset owned by the business, assign a monetary value to each input. Sum up each asset’s value before subtracting any debts or liabilities from this number.
The valuation that this approach yields is a lot lower than the business’ true worth. How so? Because it fails to consider expected revenue and earnings. Regardless, it is a great starting point for appraising a business, especially if you are looking to liquidate.
3. Research your specific industry.
When seeking an appraisal for your small business, it is extremely helpful to consider the market landscape that your business belongs to of similar companies. This sort of information can be used to strategize how to make your small business stand out to potential buyers.
Additionally, however, information from peer companies may also be used by expert valuators like BA FL|GA|HI during your small business appraisal. Specifically, the value of your business may be determined by considering the market prices of similar assets or businesses that have been recently sold in your area. Your valuator, however, may avoid this method altogether if comparable businesses fail to disclose information publicly regarding their assets and investments.
Regardless, an in-depth understanding of your industry can ensure that you obtain an informed valuation reflective of your assets and the current market landscape for the small businesses in your industry and geographical location.
Small Business Appraisal Conclusion:
Small businesses face a variety of scenarios that impact their growth, finances, and success. Regardless of how your business is faring, understanding your company’s true value and worth can be extremely helpful as you strategize and execute your business plan. If you are planning to sell, it is even better.
Want to know what a business valuation costs? Please read our blog on business appraisal pricing.