If you own a small business, one of the most important things to know is the value of your company. So here is everything you need to know about business valuation and how you can use your knowledge to increase your company’s profits.
What is business valuation?
In simple terms, business valuation is the procedures one has to follow in order to determine what a business is worth. While this may sound easy, this can be a hard process as there is no one simple formula to follow as the definition of value changes with each person you ask.
Depends on the results you are looking for
Small business valuations depend on different perspectives. For some business owners they believe their connection to the community is their most important asset, whereas others may only focus on revenue. Plus, additional economic conditions affect what people think their business is worth, whereas some CEOs will only believe they are successful if they are paid more, and some others just want to break even.
So, what do I use for calculating the worth of my business? A business valuation company will be able to help you figure it out with these three approaches:
1. Asset approach
This approach views the business as a set of assets and liabilities that addresses the question:
What economic factors need to be in place in order to create another thriving business with the same economic benefits.
So, a business valuation company will help you to figure out the valuation, the standard of measuring their value, and the financial price of these assets.
2. Market approach
This approach will compare your business to the others in the competing market. This includes the amount the buyer is willing to spend and how much each stock should be worth. This method determines the company’s fair market value.
3. Income approach
This method will look at the reasons behind establishing a business, meaning it will look into the reasons why you are going into business. So, if you are investing time into your company what benefits will it provide? The key is to look for future economic benefit above anything else, as money is the one risk factor in developing a successful enterprise.