America is a country of entrepreneurs: recent studies show that although there are more than 25 million businesses across America, fully 5 million of them have only one employee. While owner-run businesses tend to have much lower overhead than multi-employee companies, they can flounder in cases where the owner is wearing too many hats. When it comes time to perform small business valuations in advance of a transfer of ownership or outright sale, businesses with accurate, clear financial records are worth more commercially.
Although the process of small business valuations can be complex, the process hinges upon accurate documentation that clearly describes the business’s sales and finances. Companies that are ready to contract for business appraisal services should assemble at least three years worth of an accounting paper trail. If there are employees, small business owners need to make sure that they have all of the proper paperwork and identification on file.
A key part in the process of small business valuations is determining the value of propriety software, products, or services. There are many businesses that provide industrial cleaning services, for example, but the business owner who has developed new chemical formulas for cleaning products will naturally command a higher sales price for the transfer of a business. Asset evaluation is a key part of business valuations, and companies with a proven track record of sales can be considered less “risky,” that is to say more likely to produce consistent sales after a change in ownership.
The longevity of a small business can also have a positive impact on its eventual asking price: studies show that while most new businesses last more than two years, only one out of every four American businesses is still in operation after 15 years. The problem is sometimes one of market saturation: a town with three dry cleaners may not generate enough business to support four, but new businesses can founder even in the most beneficial economic climates.
What business valuation services can do is ask questions like, how much would a business owner have to spend to start up a comparable business? How much are similar businesses selling for in various parts of the country? Is this business poised to attract international attention or to expand? What is the likelihood that this business will remain viable in two years, in five years, or in a decade? Most importantly, which buyers or investors are interested in this business, and what are they willing to pay?
Again, businesses with complete, clear, financial records and clear operational protocols should do better during planned sales; new owners prize ease of transfer and do not want to inherit any financial problems along with their new business. And two different potential buyers may have drastically different plans for a business: investing in an existing business — or starting a new one, for that matter — inherently contains a high degree of uncertainty. Sometimes, even solid investments can go awry, but small business valuations can function as a “risk management” exercise and as an in-depth study of a business’s long-term viability.
At base, any business appraisal valuation has to rely upon solid financial information but will also contain more qualitative assessments as well. Any commercial investment is going to be risky to some degree, but finding an established business that inspires loyalty in its clientele is a solid first step. Given an efficient transfer process and, of course, continued economic stewardship on the part of the new owners, the chances of a business owner finding success past the 15-year mark do increase dramatically.
Overall, finding the “real value” of a business of any size is both a quantitative and qualitative process. There are always financial facts to consider, but effective small business valuations must also include the contextual information that investors will need to rely upon to make important financial decisions while the American commercial real estate juggernaut shows no signs of stopping.