For many small business owners who are selling their business, small business valuation can be a significant factor in the deal getting done because for many owners, it is extremely difficult to attach a dollar value to the business. It is a touchy subject because of the blood, sweat, and tears that have gone into building the thing.
In many cases, selling a business comes after years of struggle and leans times before, hopefully, turning the venture into something successful. Because of those years of struggle and success, small business valuation can become muddled by subjective personal attachments and pricing that is not routed in marketplace reality.
As with the value of one’s home, the actual value of a small business is exactly the amount that someone is willing to pay for it. Personal attachments and feelings are not important in finding a price for your business. Instead, sound valuation methods, accurate paperwork, and a few other factors are what is needed to successfully sell a business in the small business marketplace.
So, where do you start when attempting to put a value on your small business? There are two important places where you need to begin and they a very basic. Firstly, you need to determine why you need an evaluation of your business and secondly, you need to get the required information assembled.
When it comes to business valuation, it is mostly an economic analysis exercise. This basically means that a company’s financial information is critical in putting together an accurate appraisal. The proper small business valuation resources can help you determine where to look, specifically, but it basically boils down to the income statement and the balance sheet. When you simply determine how much comes in and how much goes out, you have a very good start at small business valuation.
The best small business valuation software will help you do a solid job of valuing a small business, especially if you have three to five years of income statements and balance sheets you can feed into the program.
In addition to your income statements and balance sheets, there are three other approaches that can best help you evaluate where your business stands in the market. First, compare your business to similar businesses in the market based on recent sales figures. How to they compare? What are the factors that would give you or that business the edge? Second, Compare other businesses based on earning power. Is location a factor? Third, make comparisons with those similar businesses based on assets. Does your company have a larger building? What equipment do you have that they don’t?
Small business valuation can seem like a daunting task, but what is likely more daunting is trying to get over the emotional weight of selling a business that you are so attached to after many years of building it to what it has become. Change can be hard, but small business valuation doesn’t.