Small business valuation is generally done for reasons of determining the economic value of the interest an owner has in a business. It is a process of procedures carried out to find the worth of a business, commonly known as the premise of value and the standard of value. These are the two key elements upon which a valuation is usually based. A small business valuation is generally done when an owner wants to establish a partnership and bring in another partial owner, or in cases of divorce, or when the owner is considering selling the business.
When the owner of a small business wants to consider how to value a company, they will generally seek out a professional in the field. There are many companies experienced in business valuation that provide trained staff to research and calculate the value of a business. Business valuation consultants will use a series of procedures to evaluate the financial, strategic, and operational aspects of the business in order to give the business owner a real value assessment that they are able to understand.
Professionals will offer a variety of services that will bring together a fair small business valuation for the owner. They will use such processes as fair value reporting, impairment testing, estate and gift tax, tax and advisory, and portfolio valuation, among others. The fact is that different business valuators will use different methods. The most commonly used methods are the review of discounting cash flow models, financial statements, and comparisons with corresponding companies.
Small business valuation resources that a small business owner will need in order to have the procedure carried out thoroughly are three to five years of both income statements and balance sheets. Clearly, the information held in the financial statements are crucial to a comprehensive valuation of the business.
Part of the value of a company is the core value. This is usually found in the mission statement of the company set down at the onset of the business. The business’s philosophies and principles, coupled with the relationship it has with partners, shareholders, and customers all make up the core value.
There are three so called broad approaches for a small business valuation. They are income approach, asset approach, and market approach. Each of these is used as the foundation for a chain of steps to follow that will lead to the business’s value. Before the appropriate approach is decided upon, however, two steps need to be followed in order to begin the process of determining which is best. The owner must first establish the reason for the valuation. Next, the owner needs to gather all the pertinent information and paperwork that will be needed throughout the process. Once these steps are taken, the proper approach can be selected.
The income approach to small business valuation is to base its value on the ability it has to bring in the projected financial benefits for its owners. The methods used to come to this determination under the income approach are the discounted cash flow method, the multiple of discretionary earnings method, and the capitalization of earnings method.
The market approach to small business valuation involves comparing the business to other small businesses by looking at their sales histories. The typical methods used in the market approach are the guideline publicly traded company method and the comparative transaction method. This method of small business valuation will come to a determination using their profits and their estimated selling price.
The asset approach to small business valuation is done using the basis of the value of its assets. With this approach, the fair market value of the assets is determined, minus its liabilities. The two valuation methods used here are the asset accumulation method and the capitalized excess earnings method.
Some small business owners opt to handle their own small business valuation on their own computer. This is possible to do because of the availability of small business valuation software. Owners will download the software onto their computer and, with the proper information added, and coupled with the business’s own accounting program, the owner will be able to calculate the value of their business without the help of professionals.