Valuing Your Business Is an Inexact Science


Business valuation analysis

Selling a business is not an easy thing to do, especially when it comes to determining its value. Unlike with a house or piece of commercial property, there isn’t really a standardized way to appraise businesses. Though you can put solid values on physical assets, it is much harder to value intangible assets such as patents. Still, when trying to sell your small business, it is important to find appropriate small business comps. Here are some tips for going about the valuation process.

When looking to value your business for a sale, there are two things you need to work out at the start: why you need the business valuation and assembling all the documents you will need for the valuation.

Determining why you need the valuation is usually pretty clear, but you may need the help of a business valuation firm to know what documents you need to assemble. You usually need you profit and loss statements and a copy of your balance sheet. A potential buyer might also want to see things such as accounts receivables, sales contracts and other documents.

Once you have determined the reason for the valuation and gathered the appropriate documents, you have to figure out what type of valuation to use. There are essentially three ways to do that. You can look for recent sales of similar-sized businesses in your industry, which is where small business comps come in. You also can value your business strictly on the assets you have or you can base it on the earnings power your business has along with its risks. Of the three, valuing based on the assets is the most concrete, but that can undervalue your business if you don’t have a lot of assets. For example, such a valuation would work a lot better for a manufacturing plant with a lot of fixed assets but not so well for a retail business in leased space that keeps little inventory on hand. Using business valuation tools may help you determine which valuation method you should use to give the fairest valuation for both you and the buyer.

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