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Small Business Valuation Options

by GBAF mag

A small business valuation is frequently used to figure out ownership and taxation with respect to the enterprise. It can also serve as a reference point on your negotiations with a prospective buyer or investor. There are some key pieces of data in a business s valuation which are critical for the smooth transfer of ownership:

The estimated revenue that an angel investor may expect to acquire from purchasing your business. This is often referred to as the “buyer’s cash flow.” This number is derived by totaling the value of all the debts, equipment, property and payroll balances of the business. A small business valuation will also consider the current value of your tangible assets. The financial concepts used in a small business valuation are very similar to those used in the purchase of other types of distressed businesses.

The balance sheet best describes the total assets, liabilities, ownership interest and retained earnings of the company. This is referred to as the “book value” of the business. As with other types of financial documents, you want to obtain the best assessment of the value of your business. The small business valuation incorporates some of the same concepts used in valuing other types of similar businesses.

Income Statement. The income statement measures and lists the income produced by the businesses’ operations. The income statement is often called the “pro forma” financial statements since it provides an accurate depiction of the income that will be produced by your companies operations. This statement represents the most accurate picture of your companies’ income and is often the first piece of information investors seek when making investments. The small business valuation incorporates similar concepts and methods of valuing retail businesses. For example, the equity of the business is included along with the equity of stock holders.

Equity. The equity of the company represents the total amount of all of the equity of the business held by the owners. The small business valuation also includes other assets such as goodwill, property, plant and equipment.

Selling Items. One of the concepts that are incorporated into a small business valuation is the concept of selling assets to finance the acquisition of future earnings. Many entrepreneurs believe that their current assets will more than cover the costs of operations in the future and therefore do not sell those assets.

Selling Options. Entrepreneurs often choose to allow the cost of operations to go out of reach by holding onto the stock or other assets. Small businesses must evaluate their own situation before deciding whether to hold on to options. If the value of the company’s assets has dropped the business may need to sell its assets to raise the needed capital. Evaluating the value of the business’s future sales and cash flows is one of the first steps to raising the necessary funds to execute a sale.

Prioritizing. This process of prioritizing individual companies rather than focusing on just one aspect of the small business industry is best for ensuring that the best businesses are selected for investment. Asking the right questions and considering the best practices of other businesses can help to ensure that the best deals are available when selling.

Asset-Based Approach. The most common business valuation used by banks and private investors is the asset-based approach. Under this method, the appraiser looks at the type of business assets being sold, such as land, buildings, equipment, and inventory. By classifying these assets according to how much they are worth, the appraiser can determine the value of each category of tangible assets. This method of valuing can provide a better picture of the current value of a company than using the market value of the company’s outstanding shares of stock.

Good valuations come from a combination of a good business model and good financial planning practices. Because intangible assets are not as liquid as tangible assets, they can take a longer time to develop a current value and make a substantial contribution to a company’s profits. In addition, intangible assets might not generate a cash flow but instead have a significant market value in the future. This is why it can be a challenge to determine the fair market value of intangibles such as office furniture, computer equipment, and patents.

Many companies choose to use the asset-based valuation method because it provides a more accurate picture of the worth of intangibles. Other companies, however, prefer to use the cash flow method, which compares future cash flows produced by the company based on past purchases and sales. This method is particularly useful for a company that plans to purchase more technologies or other unique technologies that will help the company produce more future income. It takes time for these technologies to become available in the marketplace, and the cost of obtaining them may not be worth the return on investment. As such, the cash-flow method is more practical for small businesses that cannot wait for their technology to become readily available in the marketplace.

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