Tips for Understanding the Proven Business Valuation Process
Business valuation is one of the most crucial steps when it comes to selling your business. But according to recent data, a staggering 98% of small business owners did not properly understand the value of their business. Thankfully, you can avoid becoming a part of that statistic by using the following tips to understand the business valuation process.
Business Valuation 101
Business valuation refers to determining how much an organization is worth. Financial professionals will specify a company’s value based on factors such as its:
- Assets
- Outstanding liabilities
- Financial performance
- Future financial potential
While business valuation can be conducted for various reasons, such as tax valuation or settling legal disputes, it’s particularly important when selling your business.
Most Common Valuation Methods
The most common business valuation methods fall into three broad categories:
- Asset Approach: Based on the fair market value minus existing liabilities
- Market Approach: Based on external data, historic sales, and industry trends
- Income Approach: Based on a company’s ability to generate income
If you want a quick estimate of your company’s worth, you can start with Sunbelt’s business valuation calculator.
Financial Documentation
An accurate business valuation depends on accurate data from financial documents, such as:
- Financial statements (balance sheets, income statements, cash flow statements)
- Tax returns
- Business forecasts
- Foundational/governing documents
- List of assets
- Information on pending litigation
For greater accuracy, rely on information dating back three to five years. Gathering these documents beforehand can streamline the process and lead to a more thorough valuation.
Consider Professional Valuators
A third-party valuation company can offer several benefits, including the following:
- Objectivity throughout the process
- Knowledge of the industry
- Understanding of buyer expectations
- Knowledge of regulatory requirements
- Negotiation skills
The best valuators can help you make critical decisions about your business and provide accurate insights about your company’s value, all while keeping you in control.
What Is the Purpose of this Valuation?
Business valuations can be performed at any time and for any purpose, such as:
- Insurance purposes
- Legal disputes
- Stock market decisions/Initial public offerings
- Securing financing
- Mergers and acquisitions
Above all else, business valuations are essential when selling your business. Receiving a clear valuation for your company will help you and the buyer find a fair price.
Industry and Market Conditions
A company’s value can be affected by broader trends in the market and the industry itself. Together, these conditions can affect things such as:
- A company’s growth prospects
- Industry competition
- Regulatory demands
- Market volatility
- Consumer behavior
These trends often work together such that a change in consumer trends can directly impact future profits. Therefore, understanding these factors can help you calibrate your expectations when selling your business.
Project Growth Trends
A major selling point for your business is its ability to generate future revenue. To that end, growth trends rely on internal and external factors, such as:
- Your company’s historic performance
- Current growth rates
- Market research
- Industry and economic trends
Financial projections can add value in the eyes of buyers, especially those who intend to capitalize on these trends.
Sales Analysis
Forecasting for the future can demonstrate that your company has the resources to either maintain its present momentum or expand its operations in the future, both of which can add value.
Legal Considerations
Legal considerations can encompass things such as:
- Legal disputes and litigation
- Regulatory issues
- Copyrights for intellectual property
Intangible assets can add value to your business, but it’s important to straighten out other disputes or violations to avoid deterring buyers.
Communicating With Valuators
Sellers and valuators should maintain consistent, open communication throughout the valuation process. Doing so will ensure that you have a clear understanding of things, and it can provide additional documentation to improve the accuracy of the valuation.
Choosing the Right Broker
If you need help selling your business, the right broker can help you perform a thorough valuation and guide you through every step of the sales process. Contact Sunbelt Business Brokers today to discover how we can help you accomplish your goals by selling your company.