What Methodologies Are Used in Small Business Appraisal?

Comparable transaction

There are many occasions on which a small business owner might find it necessary to produce a business valuation report. Small business valuations are used to determine the economic value of the owner’s interest. They can provide important information to financial institutions considering a loan application, to potential buyers and to owners themselves. They can be used to settle issues relating to estate and gift taxation, divorce litigation; to value partner ownership in buy-sell agreements, and many other purposes. Loans and sales of businesses also require an accurate valuation.

A professional business appraisal
It’s always a good idea to have a business valuation report prepared by a professional, who is experienced and independent. In all of the cases mentioned above, an accurate business valuation is necessary.
Business valuation services use different methodologies to estimate the value of a business, depending on the purpose for which the valuation is done. With all the necessary information, business valuation software can come up an accurate report in a very short time.

Small business appraisal methods
Small business valuations can use market, income and asset approaches, depending on the purpose of the exercise. Asset based valuations determines the value of the business according to the value of its total tangible and intangible assets.
The income based approach compares the revenues of the business with the revenues of other similar businesses. The market approach looks at the earning potential and risk assessments. Different methods are used depending on the purpose for which the appraisal will be used.

Why business valuation reports are helpful
Business valuation reports are used by financial institutions, buyers and others. However experts also recommend that small business owners should have regular, independent appraisals to keep themselves informed of the company’s state of financial health.
A multi-year record of growing revenues is impressive for buyers. But even without a sale in the offing, business valuation report helps owners to identify advantages and sources of future earnings.

How does it work?
Business evaluation services use special software to produce accurate reports quickly. In order to produce the report, they need certain kinds of financial information. The two most important documents needed are the income statement and the balance sheet.
For an accurate appraisal, financial records for three to five years should be available. While business owners can carry out the appraisal themselves, it is better to entrust the task to professionals. An independent appraisal is more accurate and will be considered more reliable.

An independent and accurate business valuation report provides important information to a range of actors, including financial institutions, partners, potential buyers and business owners themselves.

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