Ever heard the term “small business valuations” before? If not, that’s okay. In essence, it has a lot to do with evaluating the performance of a small business against certain criteria of operation in order to get an idea of how well that business is functioning. It’s almost like a report card, or a progress report, or very in-depth review of every bit of that business’s day to day operations.
Think of business valuation as an analysis exercise that tests the viability of a business’s economic situation. Perhaps unsurprisingly, a company’s financial information and records provide key input into the process. Two main financial statements are considered a must-have for business valuation are an income statement and a budgetary balance sheet. To properly conduct a valuation or an audit of a small business, one might require three to five years of historic documents and balance sheets to make the most accurate assessment possible.
Small business valuation tools can be a little tricky. This is why most businesses opt to hire a small business valuation company to perform the actual job for them. Often times the figures are not precise and a lot of factors come into play. Believe it or not, the fact that a business is in the middle of having small business valuation experts auditing its records will usually affect the results in some way. In other words, valuation results are directly influenced by your need to obtain them!
The measurements aren’t absolute, however. The process of measuring a business’s worth is a long and complex one, and it depends on two key elements. The first is how you measure business value, and the second is under what circumstances do you measure them. These metrics are referred to as “standard of value” and “premise of value.”
Two key starting points in establishing a business’ worth are: why does that business need a valuation, and how is all the information that is required to produce a result going to be gathered. Once you have those, you’re ready to proceed with its small business valuations.