In the United States, there are 26.5 million businesses, 5.4 firms with employees, and 21.1 million firms without employees. So, this basically means businesses are everywhere! An important task for a business owner is to determine the value of their business. There are five steps of business valuation, and they are each explained below.
1. Planning and Preparation
Just like running a business takes an organized effort, effective business valuation requires diligence and attention to detail. The two key starting points for establishing your business worth are:
- determining why you need business valuation
- assembling all of the required information.
The most important thing to take from this is the fact that your business valuation report is not absolute. This process differs from company to company considering it depends on how you measure business value, and under what circumstances.
2. Adjusting the historical financial statements
Business valuation analysis is a largely economic exercise. The two main statements you need for for valuation is your income statement and its balance sheet. To do a proper job, you should have between three and five years of data available.
The idea behind this is to construct an accurate relationship between the required business assets, expenses, and levels of business income these assets are capable of producing. In general, this will cause you to recalculate your income statement and balance sheet to get a more updated account.
3. Choosing business valuation methods
Since there are a number of well established methods to determine business value, it is a good idea to use multiple to get the best result. They all basically fall under these three options;the valuation asset approach, the valuation income approach, and the the valuation market approach.
Some key points to consider when choosing your set of methods include; the complexity and value of the company’s asset base, the business earnings history, and availability of data on the business cost of capital, both debt and equity.
4.Number crunching and applying the selected business methods
With all of your relevant information assembled, using business valuation software now to produce accurate results.
5. Reaching the conclusion
Finally, with everything in place you can now make the decision of what the business is worth!
Want a professional to deal with crunching the numbers? Call a business valuation service today!