Business valuation is an important step in the sale of a small business. Many business owners put off valuing their business, thinking it is too complicated or expensive. However, with the help of a professional appraiser, valuing your small business does not have to be difficult or costly.
A business valuation will give you an estimated value of your business, which will help you determine how much to sell your business for. It is also important to have a business valuation when seeking financing from lenders or investors.
Whether you need to sell your business, get out of a partnership, or just want an unbiased assessment of your business, a business valuation can help you figure out its fair market value. Here are the 7 steps that experts take when valuing a business.
1. Business History
Look at the history of the business and the reason for valuing it. The business data will tell the financial story, but the context is also very important. Many business evaluations start with a short summary of the business’s history, such as an overview of the accounting firm in a small town and its competitors. Other things that affect how much a business is worth are how far it is from the nearest highway or big city and how well the business already knows its clients. This information adds to the value and gives a potential buyer important background information to think about when making an offer. For example, a manufacturing company with four local customers and only one competitor would be worth more than a similar company with only one local customer and four competitors.
2. Valuation Standard
Choose a standard for valuing the business. When valuing a business, business appraisers choose from a set of common standards. An appraiser will list any criteria that were used to figure out the value of the business, such as the discounted cash flow, the net asset, the earnings multiple, and so on. This makes sure that everyone is on the same page so that people who want to buy can compare the same things.
3. Compare with Competitors
Compare your business to others like it. Even though your business is unique, it has a lot in common with others in the same niche. When figuring out how much a manufacturing company is worth, for example, a business valuation expert will look at other companies that make the same kind of products and are the same size. Statistics have shown that knowing how much a competitor’s business was sold for gives a good idea of how much a business is worth.
4. Review Assets and Liabilities
Look at your assets and debts. If you are closing down your business, looking at your assets can help you figure out how much it is worth. If this is the case, a machinery and equipment appraiser may also need to value the assets that could be sold again. These will be valued based on how much they would sell for in a liquidation since the business would be worth more if it was sold in pieces than if it was sold as a whole.
5. Check Financial Statements
Check your financial statements. Financial statements don’t always show the whole picture of a business’s finances. For tax purposes, financial statements often show that a business is worth less than it really is. Still, during the process of valuing a business, experts will want to look at its tax documents and financial statements.
6. Estimate Future Earnings
Guess how much you’ll make in the future. Is the business growing or is it staying the same? A business that wants to grow needs to make plans for how much it will make, spend, and make money over the next five years. In some cases, it makes sense to take into account future earnings when figuring out the value of a business.
7. Compile Critical Information
Combining the information: Each of these metrics shows something about the value of the company. For an objective business valuation, the information gathered will be put together by the appraiser into a clear and convincing business value proposition.
Final Thoughts
Business valuation is important for a variety of reasons. Whether you are looking to buy or sell a business, raise capital, or plan for succession, understanding the value of your business is critical. While there are many methods and standards for valuing a business, the most important thing is to choose a method that makes sense for your particular situation.
If you are looking to buy or sell a business, it is recommended that you seek the help of a professional business appraiser. Business appraisers are experts in valuing businesses and can help you understand the many factors that go into determining the value of a company.
Xcel Accounting offers a wide range of services, including bookkeeping, invoicing, payroll, financial reporting, and tax compliance. We also have a team of experienced accountants who can help you with your specific needs.
Contact us today and schedule a consultation or call +971 (0)55 101 0691.
