Different Approaches to Small Business Valuation

Small business valuation methods examples

There can be many reasons why small business owners find themselves in need of business valuation. The information may be needed in dealing with SBA lenders like national banks, community banks, credit unions and other service providers. An experienced and trusted business valuation company can expedite the process using business valuation tools and software.

Small business valuation methods
Small business valuations have two key starting points, which influence the outcome of the process: first, the reason why the business valuation is needed and its target audience; and secondly, putting together all the information that will be needed by the business valuation firm. For a reliable economic analysis, three to five years of financial documents, especially income statements and balance sheets, should be available.
A business valuation company looks at your company’s financial information to determine how well it is doing. Your company’s financial statement and balance sheet are the two most important inputs used by a business valuation company to provide a report on your company’s financial condition. Experts emphasize that the analysis is not an absolute but is shaped by the circumstances under which the valuation is carried out.

Approaches to business valuation
As stated above, it must be stressed that business valuation is not an absolute but depends on the reason why the evaluation is being carried out, and on its intended audience. A business valuation company can use three different approaches, depending on the type of business being valued:

  • The market approach compares the company’s financial statements and sales to sales made recently by similar businesses
  • The income approach is based on the earning power of the business and on risk assessment
  • The asset approach is typically used for asset intensive businesses and/or holding companies and is based on the company’s assets. A company’s assets are calculated using the formula adjusted assets less adjusted liabilities.

What are valuation results used for?
The results of a valuation carried out by a business valuation company may be used for a number of purposes including mergers and acquisitions, lending, estate planning, ESOP, divorce and litigation support.
Because valuations are needed for so many different purposes, they are not absolute. Business worth depends on the approach used, also known as the standard of value, and the circumstances under which the valuation is carried out, or the premise of value.

Further, a valuation us not a single event but a process, and can be seen as an input into the running of the business. A business valuation company can also provide information on how to improve the value of your business.

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