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.
How to Value a Small Business
Prepare your business for a business appraisal
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.
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.
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, it is crucial that you understand what the valuation entails. A business valuation conveys the current economic worth of an enterprise.
Although the valuation methods used to conduct the appraisal may vary among evaluators and industries, the factors included in such analysis tend to 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.
Regardless, it is helpful for small business owners to understand what the common methods include and why outcomes will differ with each method. It is helpful to speak to expert valuators, like BA F|G, when determining which business appraisal service will be best suited to 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 F|G when conducting a valuation of your small business 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:
- Tax filings and returns
- Overview of your business plan or personal finances
- Profit and loss statements for the last few years and YTD
- Balance sheets for the last few years and YTD
- 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. Although the potential buyers will not be required to provide as many documents, 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 appraisal.
2. Take stock of your assets.
Although there are many ways to assess the value of your enterprise, one approach involves considering the assets that comprise your firm. This method, although imperfect, calculates the value of a business by considering the company’s total assets and total 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 yield is a lot lower than the business’ true worth 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 F|G 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.
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, even better!