Why Do a Business Valuation Report?
If you had to tell someone today what your business was worth, would you be able to do it? Many small business owners can’t, and it makes the process of doing a business valuation report that much more important. So, in this article, we help you answer the question of why do a business valuation report.
What Is a Business Valuation Report?
Business valuation simply means determining what your company is worth. It’s literally a way to look at the risk of owning the business, the potential economic benefits for the owners of a business, and the true value of the company. Some professionals call this a business appraisal, and there are actually a number of different ways to look at this key performance indicator for your company.
Why do a Business Valuation Report?
Not sure why a report like this one matters? There are several reasons you may want to consider creating this report. First, should you ever need to sell your company, get a loan, or defend your business in a legal dispute, you’ll need to set a valuation on the company itself. This is true if you’re looking for adequate insurance coverage for your company as well. More than that, though, this kind of report allows you to prove an operational track record. Eventually, it will be able to show how your business has grown over time and help predict what it might become in the future. That can be a huge help should you have a partnership agreement in mind or should you ever wish to sell it and move forward.
How to Create a Business Valuation Report
There are many different ways to create a business valuation report, but they all start with gathering the data itself. Should you choose to work with an outside party to compile this report, initially they may ask you what your goals are with the report. After all, it’s one thing to simply want it on paper for future reference. It’s another thing entirely to accurately offer information to an insurance company. Before you get started, be sure you know what your goals are at the end. Then, you’re ready to start gathering data. You’ll need financial statements for the past three to five years, as well as those that are most current. Usually, this includes a balance sheet, an income statement, and a cash flow statement. Additionally, you will need at least two years of tax returns, a list of tangible and intangible assets, any forecasts or projections you might have available, and a business plan. If you have organizational documents that present the setup of the business, those can be helpful as well.
The process of actually compiling the report can be handled by your team or an outside firm. Obviously handling it on your own can save you some money and time, but working with a professional means you get a detailed look at exactly what your business is worth from almost every aspect, and that can help you fulfill your company’s goals.
In some cases, you’ll actually be required to work with a professional. This is typically true if you’re planning to sell the company or you’re involved in a legal dispute where proof is necessary that the business valuation is correct.
There are three main approaches to business valuations.
- Assets Approach: This is usually only used when you’re trying to set the floor for the value of your business. The goal here is to use the fair market value of the assets, subtract the liabilities, and come up with a number as if everything were to be sold at rock bottom pricing.
- Income Approach: In this method of business valuation, the income the business generates is considered the most valuable piece. Usually, an appraiser uses a weighted average of historical data to determine what the cash flow might look like in the future. Owner compensation is a key piece of data here.
- Market Approach: When businesses use this method, appraisers look at how much other similar businesses have sold for in order to better create an overall value for the company. It’s a bit like comparable sales on the real estate market. It can be incredibly useful when there are many comparable businesses in the same industry, but it doesn’t work well if your company is fairly unique.
When to Get a Business Valuation
The timing of a business valuation actually doesn’t really matter. While most companies do it as part of the succession planning process or as they look to merge with others or raise capital, many more do it just to help better plan the future of the company.
Why do a business valuation report? A business valuation report is just one step in ensuring your company is as healthy as it should be. At AMB, we can help you better understand how healthy your company is and how it can get stronger. Learn more about our free business health check and the many other diagnostic tools we have to offer when you contact us today.