Are you currently considering selling your small business? Are you planning on buying another business in order to grow your own? Are you looking for investors? If any of these situations apply, your first step should be to obtain a business valuation. Why? Because a business valuation provides you with a real-time estimate of the company’s market value. This process may sound daunting at first, but rest assured that there are many business valuation experts out there who can help guide you through. To give you a starting foundation, let’s run through the basics:
- How is business value measured? The worth of any given business is calculated using two key elements: the standard of value and the premise of value. These elements ensure the valuation is as accurate as possible, taking into consideration the reason for the valuation and the circumstances in which it is being generated. The standard of value refers specifically to the conditions of the valuation. This could be fair market value, which is the worth as determined by a willing buyer and seller; investment value, which is the worth as seen by a particular investor; or intrinsic value, which is the worth as determined by an exhaustive review of the business’s economic potential. Meanwhile, the premise of value refers to the assumptions that are being made throughout this process. The assumptions might not reflect the exact conditions of the current market, but they are nevertheless useful as a way to create a uniform standard upon which to base the business valuation. Together, the standard of value and premise of value are used in business valuation tools to give you a thorough understanding of the worth of any company you are are buying or selling.
- What documents are needed for a business valuation? The company’s financial information is the key ingredient for a valuation. To produce the valuation report, both the company’s balance sheets and income statements are required. In general, you can expect to need anywhere from 3 to 5 years’ worth of these two types of documents for a small business valuation.
- Who will provide the valuation? Obtaining a business valuation is relatively simple. You can use small business valuation software to perform the calculations, or you can consult business valuation experts at a trusted firm of your choice. Either way, you will end up with a concrete sense of the company in question’s value.
Should you decide that this is a path you want or need to tread, business valuation experts can provide a more comprehensive overview of the process tailored to your unique situation. However, the items listed above are the essentials you would need to understand in order to obtain a valuation. Consider your first round of research complete!