Do you own a business or work for a business that either regularly gets a business valuation report or has never had business valuation services before? Regardless of which type of company you fit under, it is important to understand why this valuation market approach is so essential to keeping the business afloat year after year. If you do not regularly use a business valuation service to assess your business, you risk losing the business and will constantly fear the unknown as you are unaware to the company?s current standing financially.
So, what exactly is business valuation and what is the typical valuation market approach?
Business valuation basically considers the company?s financial information in order to fully understand the value of your business. Understandably so, this can waiver within a year and year after year. It is not a necessarily a steady or constant thing. You cannot simply have your business value evaluated once and choose to never again have it done.
What is required to get a business valuation report?
There are two main things needed in order to asses your business? value. The two documents are both financial statements related to your business. The first is an income statement, and the second document is the balance sheet. In order to get the most accurate understanding of your business and its value, most firms prefer to have 3-5 years of historic statements made available to them. If this is not an option, you can simply provide whatever documents you do have.
How are these financial documents assessed to determine your business? value?
There are a few ways that firms can assess the documents when they are attempting to give you a report of your business? value. In total, there are three approaches most commonly used. The first approach is by comparing your company to recent sales of similar businesses. The second is to base it on the business? earning power and risk assessment. The third approach is to consider it based on the company?s current assets.
As previously stated, it is important to remember that one business valuation will not stand as accurate forever. A business? value is not absolute. Additionally, it can be dependent on a variety of factors that may shift from company to company or from time to time. For example, it may differ depending on how you measure business value or it may be dependent on certain circumstances.
For reasons such as these, it makes sense why there are certain businesses that flourish, why some fail after a year and why others fail after many years of being in business. It also helps explain why some businesses are able to hire a multitude of employees and why there are 21.1 million firm in the United States that currently have no employees.
Has your business ever had a business valuation report or used a valuation market approach? Let us know in the comments your experience with business evaluation services.