Business Valuation What You Need to Know

Small business valuation formula

Whether you are looking to determine your business’s worth in order to assess whether an offer to buy is fair, to obtain bank financing or in preparation for an exit strategy, knowing how much your business is valued at can be crucial. Business owners might need a valuation for a number of different reasons, including identifying weaknesses with a view to improving operations, as part of the financial reporting processes, or to improve profitability.

If you are asking “what is my business worth”, there are a number of ways to obtain small business valuations, from online business valuation calculators to business valuation experts who specialize in helping business owners with how to value a company.

There are two key elements to a small business valuation, namely the standard of value and the premise of value. The standard of value has to do with how you measure business value, while the premise of value has to do with the circumstances under which a business is valued. This means that your need for business valuation influences the valuation results. The premise of value, then, looks at whether the business being considered for valuation is a going concern, in other words whether or not it will keep operating after the valuation. If it will cease to operate, this is called a liquidation or break-up.

Business valuation software can offer a good idea of the value of a business, but experts will be able to provide a more thorough picture in most cases. There are three approaches to valuing a business. You could do it by comparison, meaning that you look at what similar businesses were sold for. You could look at the earning power of the business or lastly, you could assess a company’s assets for value. Different approaches are used by different experts and different business valuation calculators.

In the most part, this is an economic analysis exercise and company financial information is a vital part of the process. Key to this are the income statement and the balance sheet, both of which are needed for a business valuation. In most cases, three to five years’ worth of historic balance sheets and income statements are needed to do an accurate business valuation. Ensuring that you have these documents to hand when requesting a valuation will make the process much easier and offer a more accurate picture of the company’s worth.

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