Are you interested in knowing more about small business valuations? In order to understand this detailed process, it’s important to understand the concept of a valuation market approach.
Experts consider business valuation as an exercise in economic analysis. A business valuation firm, for example, will work with a company’s financial information as part of this process. The end result will be a business valuation report that is based on the analysis of this information.
When small business valuation services are provided, two types of financial statements are needed to begin this process: business income statements and balance sheets. In order to place a value on a small business, there should be at least three-to-five years of these documents available. It may be difficult to place a value on the business if it has been in operation for less than three years.
A valuation market approach uses information based on the following circumstances to determine a small business’ value:
- A comparative analysis with similar, recently-sold businesses
- Earning power
- Assets
There are several factors that can influence the valuation results. One of the primary factors pertains to why the business owner is seeking a valuation of their business at this time. A business’ value, or worth, isn’t absolute. Whether or not there is a need or demand for a particular type of business can make a difference in how its worth is measured.
There are two major elements, however, which determine how a business’ worth will be measured. These are referred to as the standard of value and the premise of value.
More simply, the worth of a business depends on how its value is measured as well as the circumstances under which it is being assessed. If, for example, a residential real estate business’ value is being valued, there are several important factors to consider. These might include, but not be limited to, the following aspects:
- The real estate office’s location
- The local housing market
- The number of houses sold
- The frequency with which houses have been sold
- The houses’ locations
- The houses’ fair market value
- The asking and selling prices
When a business is undergoing valuation, there are a variety of tools that a business evaluation service will use. In addition to having professional and well-trained personnel on staff, they will utilize small business valuation software and calculators.
