The Art of Business Valuation

Your motive to find the value of a business may range from planning to buy or sell the business, planning strategic mergers, raising capital through borrowing, acquisition plans and so on. This article will shed some light on a few major issues that you may face at any business valuation, and offer some tips on how you can deal with them.

First, ask the question: "Am I qualified to evaluate my business?" In case this is uncharted territory for you, look for a business professional that offers these services. For example, a CPA offers general business valuation services; handling different accounts, finances and tax preparation permits an experienced CPA to gain important knowledge well-suited for evaluating a business. More specialized financial experts or consultants can also lend their know-how, however, their background and experience needs to be thoroughly investigated prior to hiring them.

Business brokers are a third option to evaluate a business, since they have many years specializing in purchasing and selling companies (which, obviously, involves a great deal of evaluation.) Commercial estate brokers or agents are very good at appraising real estate, but the less knowledgeable ones lack the skill and experience to properly value more intangible assets such as goodwill.

So what are most followed business valuation methods? There are several methods at your disposal, but the most famous methods that are adopted by professional and experienced business agents are usually among the following:

Letter of Opinion:

A Letter of Opinion is a restricted use of the valuation system, intended for smaller companies with sales below $250,000. The basis of this business valuation is usually strictly for marketing purposes within the industry.

Value Analysis:

Value Analysis is optional cash flow, as most of the Main Street businesses are all bought and sold based on this system.

Formal Business Valuation:

This involves financial analysis and a review of the company's balance sheet, with supporting documents containing reviews of the company's historical and project earnings.

Mergers and Acquisitions Valuation:

Mergers and Acquisitions Valuation is a complete evaluation for transactions, and is also developed with "Uniform Standards of Professional Appraisal Practice".

Financial Statements:

A broad term, these can actually include any of the following: income statements, balance sheets, statement of changes in the company's financial position, stockholder's equity and partner's holdings statements for the last 5 years, list of equipment, list of subsidiaries, aged accounts (receivable and payable), depreciation schedule, existing contracts with the employees, franchise/royalty/customer/loan agreements, project budgets, and employee benefit plans. This is by no means a comprehensive list, but it covers the basics of things that you'll be the most interested in researching.