Business valuation is a process that determines what your business is worth. The process begins with the definition of the task at hand, and ends with the business value conclusion. There are five steps that are involved in this process: planning and preparation, adjusting the financial statements, choosing the business valuation methods, applying the selected valuation methods, and reaching the business value conclusion.
Running a business takes careful planning and disciplined effort. A business valuation helps you organize and pay attention to what is important in your business. The business value is determined by your need for business valuation. It depends on how you measure business value and why you measure it.
For example, if you want to sell a business that has been doing well, with growing revenues and profits each year, you need to utilize the services of a business valuation firm before searching for a buyer. Once you determine the business value, and the parameters that determine how you measure that value, you can then gather data that relates to business value, such as business financial statements, operational procedures, and marketing and business plans.
The second step in the process is adjusting the historical financial statements. What a
business valuator needs are the income statements and balance sheets. If you have a small business, you need to have three to five years of historic income statements to be able to determine the business value accurately.
Once the data has been prepared, a
business evaluator chooses the business valuation method. The options are assets approach, market approach, and income approach. The method you choose depends on a number of factors that include the complexity and value of the companys asset base, availability of the comparative business sale data from the market, business earnings history, availability of reliable business earnings projections into the future, and availability of data on the business cost of capital, both debt and equity.
After collecting data and determining the valuation method, the
business valuers calculate the business value. This involves applying the chosen valuation method that should produce accurate results. Once the results are produced and determined, you can decide what your business is worth, which is known as the business value synthesis. Your own view of the business value is based on several results from the various valuation methods applied. The valuator uses a weighting scheme where weights assigned to the results reflect their importance in reaching the business value estimate.
