It can be difficult for business owners to assess whether or not their businesses are going in the right direction for a number of reasons. For one thing, there is an obvious emotional investment for business owners. Nobody wants to admit that their company is doing poorly; and many will refuse to properly assess what is happening simply because they wish to avoid the truth. For that matter, many business owners know that they aren’t the most objective parties, and therefore don’t want to evaluate their businesses on their own due to a fear of risking incorrect results. Some business owners don’t have these problems, but simply don’t know where to begin on a practical level. Knowing your business’s value is important on many different levels. It can tell you whether to stop or move forward. It can also let you know what your company is worth; therefore, if someone is making you a poor offer when attempting to buy your company, you’ll know. With that being, small business valuations are usually best left to the professionals. The more professional a business valuation is, the more sure a business owner — and a potential buyer or investor — can be about knowing what to do next.
What Is Business Valuation?
First, let’s look into what goes into making business valuations. Overall, this is largely an economic analysis exercise. It relies heavily on the company’s financial information. There are several things that you will need to provide in order to receive an accurate assessment. You need an income statement and the balance sheet, firstly. The income statement figures into the valuation income approach, by which the value of the company is assessed through its operating income. The valuation income approach is ideal for companies that seem to theoretically be doing well, but are having an issue with income versus output. Of course, the valuation income approach can’t be relied upon solely through one income statement, which is why the client needs to provide three to five years’ worth of income statements and balance sheets. The valuation income approach can be very revealing, and let a business owner know what he should be concerned about. In total, however, there are three different approaches to business valuation. One is through the comparison of your recent sales to those of competitors; another is based on the company’s earning power and risk assessment; and the other is based on its assets. Understandably, all of these approaches come back in one way or another to income.
What Can Influence A Business’s Valuation Results?
Many different factors can influence the results given through a business valuation report. Some, again, have to do with bias — which is why an unbiased business valuation firm is so valuable. But really, a major factor is your need for business valuation in the first place. This may seem surprising — but in fact, business valuation is far from absolute. This is a process of measuring a business’s worth, and that in turn is dependent on two distinct elements. One is how you measure business value, and the other is under what circumstances you’re measuring its value. These elements are known formally as the standard of value and the premise of value. Knowing these elements ahead of time can give you a better idea of what the outcome will be, and therefore you can be prepared. But again, it’s important that if you’re questioning whether or not to take advantage of these services — you should.
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What Should I Do If The Results Are Bad?
Some business valuation firms also offer professional advice for clients following the results of the business valuation. If the results weren’t what you wanted, take stock of what you have and think carefully about what to do next. A bad result doesn’t mean shutting down your company; but it could mean that you need to consider serious changes.