News & Resources

Business Valuation: What it Is and Why it Matters

Jan 20, 2021 MicroBilt News

Business Valuation: What it Is and Why it Matters

A business valuation is an essential tool prospective buyers use to determine if they are interested in purchasing a business. Ultimately, it offers a big picture “snapshot” of the owner’s interest in a business. It is a tool many buyers use to help them determine how much they are willing to pay for your business.

That doesn’t mean that a small business valuation offers no benefit to the owner of the business. If you’re considering selling your business, for instance, you need to have an idea of the value buyers will see in your business. This can help you decide if you’re willing to sell now and what kind of price you can expect in the process. Other reasons for small business owners to consider a business valuation include:

  • To determine if an acquisition offer is sound.
  • To resolve estate and gift tax disputes.
  • To determine assets in a divorce.
  • To buy out partners in your business.
  • When partners are seeking to sell their interests in the business (determines the value of their ownership interests).
  • In the event that you’re involved in a contested estate.

The good news is that most business valuations use a variety of factors over time to determine the value of your business rather than a single moment in the history of your business.

Business Valuation Methods to Consider

There are multiple approaches to consider when conducting business valuations. Some are more common and widely accepted than others. The following are among the most common business method valuations used today.

  • Adjusted book value valuation.
  • Debt assumption method.
  • Tangible assets method.
  • Intangible assets method.
  • Discounted cash flow analysis.
  • Asset valuation.

Conducting a thorough and accurate business valuation is a time-consuming and labor-intensive process. That is why many small business owners considering them opt for business valuation software to aid in the process.

How to Do a Business Valuation

There is no one specific method for how to calculate business value. That is because there are so many variables. As a business owner, you assign intangible value to the business related to your emotional connection to your business. After all, it was your blood, sweat, and tears that made the business what it is today. Unfortunately, those things do not factor into the value of your business, financially speaking, at all. While there are business valuation services that can conduct audits to determine the value of your business, they can be costly. In order to conduct your own business valuation, you will need quantifiable and measurable information, such as the following:

  • Earnings history and current business income. These are the nuts and bolts for many businesses.
  • Location of the business. Location can have a huge impact on visibility, value, and growth or expansion potential.
  • Business assets. This includes property, inventory, stock, real estate, equipment, etc.
  • Business growth possibilities. This information tells prospective buyers if your business is poised for growth based on products, market, demand, and other factors.
  • Business reputation. If your business has a stellar reputation in the community and the industry, it is a good indicator for buyers that adds value to your business.
  • Management team. Most small business owners understand that your business is only as good as the team you have in place to manage your business and that adds value to your business for potential buyers as well.

Because the calculations are so complex and varied, you may be wondering “who does business valuations?” You don’t have to ask that question, however. There are many business valuation tools that can help you through the process of conducting your own business valuation. There is even business valuation software that can be essential for aiding you in your efforts to determine the value of your business.

MicroBilt Offers Software Solutions for Your Business Valuation Needs

Whether you’re an investor considering purchasing a business or a business owner contemplating selling your business to move on to your next adventure in life, you probably know by now that professional business valuation services are costly and they take time. That makes the process one that isn’t as helpful or beneficial as you might like it to be.

Business owners can conduct their own business valuation. Doing so helps you save time and money while giving you a strong indication of what your business is worth. The other benefit of a business valuation is that you learn more about your business in the process and how value is created and measured within your business. This knowledge can help you increase the value of your business, over time, for potential buyers.

Whether you’re a business owner or someone planning to make an offer on a business, a thorough business valuation is one of the most important decisions you can make to protect your interests and to help determine the financial “worth” of the business. MicroBilt is happy to help you with all your business valuation needs. Visit today to learn more about the variety of products and business valuation tools we have available.