If you’re a small business owner, have you ever wondered what the value of your business is or why you might need to find the value of it?
The value of a business is important in understanding short-term and long-term financial goals. The same acumen that go to figuring out what your house is projected to be worth in three years or how much your car is depreciating each month can give you ideas about where your business should be in five years–and if you might want to sell it.
The two key starting points for determining how much your business is worth are figuring out why you want to value your business and then assembling all the necessary resources. There are three approaches in determining the value of your business:
- A comparison to the recent sales of similar businesses.
- Based on your business’s earning power and risk assessment.
- And based on your business’s assets.
It certainly may not surprise you that answering the question What Is My Business Worth is a largely economic exercise. Analyzing your economics, in particular the income statement for your business and the balance sheet, is the main component. But to do a proper business valuation, you need three to five years of those materials.
Here one of the small business valuation resources areas to look at: Real Estate.
Oftentimes, the value of real estate is entwined with the value of the business. Businesses like gas stations, marinas, or bowling alleys create a special purpose for the real estate that lends to their values merging in a complex fashion. It is possible to leave the value of the business tied into the real estate value. It is also possible to untangle the two and find the separate values of both the real estate and the business on it.
Another area of the small business valuation resources areas to look at are the liabilities.
The liabilities of a business can refer to many parts of the business. They include debt, such as credit cards and loans, bills, contracts, and the money you owe to workers such as wages, payroll taxes, insurance, and benefits. Liabilities should show up in your balance sheet and is just one specific category to factor in when doing a small business valuation appraisal.
When it comes small business valuations, there are two important types of value that need to be understood: the standard of value and the premise of value. The standard of value is how you measure business value, while the premise of value is under what circumstances.
An example of this methodology is using the income statements and the balance sheets as part the standard value of your appraisal. But the premise of value may assume that the company will stay as it is, or grow, or even decline.
Small business valuation resources are useful for determining the value of your business. Why you choose to do this valuation is important.