Are you thinking about selling your small business? Strongly considering it? Definitely planning to sell? Whichever situation applies, you’ll want to contact a business valuation firm to have them conduct a business valuation and analysis. During this process, you’ll also have the opportunity to learn more about a comparable transaction, which, according to Investopedia.com, is a method of determining a company’s value when it is on the market.
Whether you’re just testing the waters or are determined to sell your business, It’s important to be clear on the reasons why you want–or need–an evaluation of your business’ value. Your reasons for wanting this assessment actually have the potential to influence the valuation. It may also be surprising to note that the value of your business isn’t absolute.
When a business evaluation service is determining your business’ worth, there are two key elements they utilize to determine this information:
- The standard of value
- The premise of value
The standard value pertains to how a business’ value is measured, and the premise of value pertains to the circumstances under which it is being valued.
There are three basic approaches used to determine the value of your business:
- Comparative analysis of recent sales of similar businesses
- Earning power and risk assessment
- Company assets
When undergoing small business valuations, there are two main starting points:
- Determining the why for the valuation
- Compiling required information
Business valuation is considered to be an exercise in economic analysis. Your small business’ financial information will provide the necessary data for this process. There are two primary financial statements you will need to conduct and continue this process:
- Income statement
- Balance Sheet
In order to successfully complete this business valuation analysis, you should be able to provide three-to-five years of income statements and balance sheets.
Once a comparable transaction has been completed, you and the small business appraisal company you hired, should have an accurate picture of what your business is actually worth. At that point, you may choose whether or not you want to put it on the market.
Interesting to note is that on a monthly basis, there are approximately 543,000 new businesses opening. There are more employer businesses, however, that close for business.