Business valuations have long been a popular method of analyzing a business’ true value. Companies, usually smaller in size, seek these analysis out because it is one of very few indicators of a businesses’ success which is as accurate and thorough as it is. The measurements and calculations made are so sensitive that the very fact a business is undergoing a business valuation is enough to influence its score.
Despite their complexity, business valuation experts say the aim is actually to take the most simple factors into account. Primarily, business valuations are an economic analysis exercise. Perhaps unsurprisingly, the financial information that a company provides is key input for the process. It’s par for the course for a business to be in operation for a few years before even conducting a valuation, due to the sheer amount of data that needs to be produced and calculated. The main piece of data a small business needs to produce in order to have a small business valuation take place is an income statement. A balance sheet is also necessary. To do a complete and thorough job in valuing a small business, it should have about three to five years of historical income statements and balance sheets available. Even the most successful startup in history might not have enough data to have a valuation performed until they’ve been operating for a few years.
Of course, there is always business valuation software. Business valuation software is an umbrella term for a suite of software which a business can purchase should it choose to perform a valuation of itself on its own. The small business valuation model allows for this, as the software takes many of the same factors into account when producing a value.
In effect, the value of a business can be determined by using three different approaches, whether a company is performing the valuation or you’re using software. They are: comparing recent sales to those of other businesses, based on the business’ earning power and risk assessment, based on a company’s liquid and solid assets.