Business valuation is a way of measuring the financial worth of a business. It may seem surprising, but this is not an absolute value. It depends on the type of business valuation methodology used, which in turn depends purpose of the valuation. Institutions such as national banks, community banks, credit unions and other SBA service providers often require reliable information on small businesses. Business appraisal services use database and valuation tools to evaluate main street businesses with an average revenue of $1 million.
Three approaches to business appraisal
Business appraisal services need two things to get started: the reason why the business valuation analysis is needed, and all the relevant information. A business valuation firm will use one of three methodologies to determine the worth of your business: the market, income and asset approaches.
The three approaches can determine the value of a business by comparing your sales to recent sales of similar businesses; according to the earning power of the business and the risk assessment; and according to the assets owned by the business.
Reliable data and financial statements are crucial
Business worth thus depends to a large extent on who’s asking, and for what purpose. The standard of value and the premise of value refer to the approach used to measure business value, and the circumstances under which the valuation is made, respectively.
Data used by business appraisal services must be reliable and complete. Small business valuations can be based on data from national, regional and local SBA lenders across the U.S. Business evaluation services will also need company financial information, including the income statement and the balance sheet.
Why professional business appraisal services are necessary
The most common reason why small businesses need to be appraised is because the owners are thinking of selling and want to determine a fair price. While there are online appraisal tools, in this case a do-it-yourself approach may not be the best idea. What’s needed is an impartial evaluation of the worth of the business and professional business appraisal services can provide it.
In the financial world, trust is an essential commodity and unfortunately, it is in short supply these days. Banks are no longer regarded as trustworthy, and the ripple effect influences all financial transactions.
Business appraisal services that can provide reliable and impartial evaluations thus fulfill an important role in the world of small businesses. Whether the valuation is needed for a sale or a loan, accurate financial information will benefit all parties concerned.