Four Steps in Developing an Accurate Business Valuation

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Whether you are ready to sell your business and move on to the next phase of life, gathering investors in exchange for equity, or looking to liquidate your business assets to pay off debtors, you are probably in the market for a great small business valuation software provider. Small business valuation software is one of the best business valuation tools you can use to develop a reliable valuation for your business, which gives you the best position to achieve the goal behind the valuation. However, there are several factors that you need to consider before getting to your small business valuation software. A few steps that you should take before you even open the shrink packaging of your small business valuation software include:

  1. STEP ONE: Determine the purpose for your business is valuation so that you can develop the best plan.
    There are a variety of reasons that business owners use small business valuation software, and each motivation dictates the next steps in the process.

    In some cases, you have a sustainable business, but you’re ready to sell and retire, or move on to the next chapter of your life. When you are not in a huge hurry to sell your business, using the fair market value to develop your business valuation is the best course of action. This will enable you to sell your business to the highest bidder, and allow operations to continue after ownership is transferred. On the other hand, if you need to sell your business in a hurry to pay off creditors, you may want to use the forced liquidation premise of business valuation, which helps you transfer your assets into cash to pay off creditors quickly.

    There are several other approaches to business valuation, determined by the purpose of the valuation in the first place. Understanding the goal behind your business valuation will help determine the next steps you need to take.

  2. STEP TWO. Collecting the information you need in the shape you need it.
    The two most important documents that your small business valuation software will use to help calculate your business is value are your income statement and balance sheet for the last three to five years. Business owners have a fair amount of discretion when developing these reports. If you have been preparing your income statement and balance sheet in a light that reduces your tax burden, you may need to reorganize them in such a way that improves the valuation of your business. While you obviously need to maintain accuracy in the reports, using your discretion to recast the information may significantly improve the outcome of your business valuation.

  3. STEPS THREE. Identify the best business valuation methods for your circumstances.

    Your business valuation will be based on one of three methods:

    • Asset approach: Determining value based on your asset to liability comparison.
    • Market approach: Comparing revenue with like businesses in your industry.
    • Income approach: Determining the earning power of the business.

    The most reliable business valuations actually utilize more than one method, so that the outcome can be compared for accuracy. A few factors that will help you determine which method to approach with your business valuation include:

    • How complex the value of your assets are.
    • The availability of comparable sales data from other businesses in your industry.
    • Having access to the income statements and balance sheets for the last five years of your business.
    • Being able to accurately project future earnings.
  4. STEP FOUR: Inputting the data into your small business valuation software and developing a final valuation.
    Now that you have collected all of the necessary information you need, and determines the best business valuation method (or methods) to use, inputting the data into your business valuation software and creating a reliable valuation is possibly the easiest step in the process.

    Keep in mind that the final numbers you get in your business valuation is not a hard and fast science, there isn’t necessarily a right or wrong answer, as long as your are ethically representing the facts of your business. For this reason, you may decide to use a combination of several methods to create the most accurate answer.

Are you in the process of developing a small business valuation? If you have any questions about the process, please feel free to inquire in the comments.