The small business valuation formula is a simple, yet important one. Used for analyzing the worth of a small business, this formula takes years of financial data, the business model, business practices, and company history into account. It’s a thorough and inclusive way to determine what sort of business is being run — an ineffective one, or one that’s bringing in tons of money.
Small business valuation formulas take a lot of factors into account though there are two big ones that are looked at. An income statement and a balance sheet are thought of as two of the main pieces of input in this process. In order to properly perform a valuation of a small business, there should be at least three to five years worth of historical financial data to pull from, although more is preferable. No valuation is complete or accurate without at least that many years of data.
Once enough data has been collected, the valuation can begin. The formula goes to work taking three main things in mind: how your recent sales stack up against similar business valuations, how the business’ earning power and risk assessment are handled, and what kind of assets the company has.
There are some more complicated facets of these small business valuation services. Interestingly, the act of having a valuation performed on your business inherently changes the outcome of the results. The reason for this is simple. A valuation is an arduous process that aims to accurately determine the worth of a business. Business value is never absolute. It’s hard to calculate. The fact that your business is seeking a valuation affects how you measure business worth, according to the formula.
Whatever your reason for seeking out a small business valuation, just know that the process is involved and can take some time and effort. However, the results are priceless — you get a good idea of exactly how much your business is worth.