There are many ways for determining the value of a business, depending on its financial health, its balance sheet, current sales, projections for future earnings, and past sales of similar businesses in the same industry. Each method has its advantages and disadvantages and is used differently in various situations. It is vital to understand each way and evaluate the business’s potential for growth.
The first and most common method is through the Balance Sheet. The Balance Sheet is the statement of all income and expenses of a company on a monthly basis. The difference between the income statement and balance sheet information can be used to determine the worth of a business. An example of this is a company with one division and three business units would have three separate sections, one for assets, one for liabilities, and one that represents the income statement.
There are two types of information on the income statement: income from continuing operations and net income. The difference between the two is that net income is the total revenue of the business minus expenses, while continuing operations include depreciation, amortization of intangibles, depletion of fixed assets, accounts payable, and other expenses. When a business has expenses it subtracts the costs of goods sold from the revenue of the business.
The second method of valuing a business is through the Business Strategy or Business Plan. The business plan is an outline of the company’s mission, goals, strategy, plans for operations, products and services, capital commitments, financing, management and control system, business structure, and future plans for the business. The business plan is used as a tool for obtaining investment capital. It is not a substitute for the evaluation of the business’s financial health.
An investor may also use the Business Strategy as an evaluation tool to determine the potential for the business to grow and expand. This approach takes into consideration the current and future sales of comparable businesses in the same industry and also takes into consideration market conditions. This allows the business to be compared with its peers in the same industry.
The third method of value assessment is by comparing the operating and cash flow of the business. Businesses generally have two types of operating segments; gross revenue and net revenue. A business can have both gross and net revenue depending on the type of transactions that are taking place. Gross revenue is the income earned from the sale of products, services, equipment, assets, inventory, or cash. Net revenue is the total revenue minus the cost of the same transactions less the cost of production.
The fourth method of business valuation is based on the Business Strategy. Business plans and other forms of business planning are reviewed to determine the best course of action for the company to move forward in the present and future.
These four methods are only a few of the many ways for determining the value of a small business. Other methods such as marketability, credit ratings, customer loyalty, financial strength, marketing, location, franchise operations, and business model are also important factors in determining the worth of a company.
Valuations are conducted in many different ways. There are many organizations that have special services or programs for valuating small businesses. These organizations will often offer a free or at a nominal fee service for the purpose of providing information and assistance in determining the value of a company.
Value is not just based on a business’ worth. An investor is looking for a company’s value with respect to their investment and the potential for future profit. Many investors want to receive a return on their investment and will not purchase a business that will not make a profit in the long run.
An experienced accountant or business valuation service can assist in providing this kind of service. The person or firm will assess the business and then provide recommendations as to value it. based on the information they are given.
For more information and assistance in obtaining this service, contact a small business valuation service today. These services can provide you with a free or at a nominal fee service to help you assess your small business.