When you’re interested in becoming a business advisor, you may already be aware of the types of services provided by a business valuation firm. You may also be familiar with and know how to use business valuation software and other business valuation tools.
If you are just starting out as a business advisor, or have been focusing on the development of a different niche, you may be interested in knowing more about business valuation. Were you aware, for example, that business valuation is considered to be an exercise in economic analysis?
There are three approaches to determining the value of a business:
- By comparing recent sales of similar businesses
- By the business’ earning power and risk assessment
- By determining the business’ assets
Whether you choose one or all three of the above approaches, you will also want to collect the two primary types of financial statements used for valuing small businesses: income statements and balance sheets. It’s important to note that you should have between three-to-five years of these statements in order to effectively proceed.
One of the intriguing aspects of conducting a business valuation is that the results are influenced by the need for having the valuation conducted. When measuring a business’ worth, or value, there are two key elements to consider. The first pertains to how the business is actually valued, while the second pertains to the circumstances under which it is valued. The standard of value and the premise of value are the formal terms used to refer to these elements.
The standard of value, according to Investopedia.com, pertains to the actual medium of exchange that is mutually agreed upon. This could be the U.S. dollar or other types of currency. This is an integral element because it assists with creating consistent prices for both goods and services.
To further explain premise of value, one consideration is whether or not the business will remain in operation after it is sold. A successful business with ongoing clients, for example, will have a greater value than one that doesn’t.
Once a business valuation analysis is completed by a business valuation firm, decisions will be made on how to proceed. There may be other issues that arise during this process which may or may not have an effect on whether or not the business is sold.
You can learn more about business valuation by contacting a firm for more detailed information.