Over the course of the life for any large or small business, there will most likely be the need to do a small business valuation. There are a number of reasons this is done. This can be because the business is about to be sold, the company is looking for investors, litigation and a host of other reasons. It is for this reason that there are so many business valuation firms working around the country to help small business owners complete this kind of analysis.
- There are standards that need be met by business valuation firms. When completing a business valuation report, the professionals who complete the appraisals and audits have to abide by certain standards and guidelines. These are set down by the Uniform Standards of Professional Appraisal Practice (USPAP). Failure to comply with the official standards can have serious consequences as these are there to make sure the professionals handling these evaluations have the necessary qualifications and experience to do so. When they do not comply, their credibility can be called into question making their word less valuable in a host of situations. It will also call into question any and all of their work.
- There are three approaches that are used to conduct a proper business valuation analysis. Business valuation firms use these approaches to conduct their reviews of a company. The first is the valuation income approach. This method takes the pros of investing in a business and compares them to the drawbacks, which are the risks and any uncertainty with the business or the industry. The valuation market approach looks at the sales of similar businesses and makes comparisons and evaluations that way. The valuation asset approach sums up the company’s assets and subtracts their debts and other liabilities. This is not a good method for a lot of businesses.
- The business valuation is a snapshot of how much that company is worth at one moment in time. Like a photograph of a person, the person’s looks may change and make that photo look nothing like them. A business may have one valuation done and then a year later that analysis is no longer valid or applicable. While the final report done by a business valuation firm is good when it is completed, the report is static while the business is not.
- It is possible to have more than business valuation at the same time. While that may seem counterintuitive, because the different valuation approaches look at the company from different angles, they can come up with different answers. As in the analogy of the photograph, a photographer can take images of the subject from a variety of angles and in different lights and while the pictures are of the same subject, the images produced can look very different from each other.
- Business owners who want to have a business valuation done need to get a lot of paperwork together. Because business valuation firms are looking at the financial value of a company, before they can begin their work, there are a lot of documents that need to be procured. They should get their tax returns for up to five years, whatever profit and loss statements they have, balance sheets, inventory and asset lists, projections they have had done, any prospectuses that have been drawn up and any liabilities they may have. The business valuation firm may need other documents as well to make this as accurate as possible.
- A good business valuation can be used for a number of purposes. These can give a business owner detailed and valuable insights into what risks face their company. It can show investors the benefit of placing their money in that business, help them determine the right price to set when selling, or find other avenues of new funding. While some business owners find the process to be a bit painful to go through and initiate, at the end of the day, it is a very useful tool to help them grow their business, deal with shareholders or sell it, if that is what they are looking to do.
One thing all small business owners need to do before they embark on a small business valuation is try separate themselves emotionally from their creation.