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Determining Value: How Does Business Appraisal Work?

business appraisal, Business Valuation, value of the business, intangible assets, increase the value

Whether you plan on buying or selling a business, understanding how a business appraisal works and what goes into it is a must. This understanding will allow you to make sure you get the best price for your business or you get the best deal when you’re buying a business.

Even if you can’t do a business valuation on your own, it’s wise to have some idea about how the process works instead of putting all of your trust in someone else’s business valuation.

Continue reading this article to learn more about the ins and outs of valuing a business.

The 411 On the Business Appraisal Process

Whether you’re thinking about using a company to help you value your business or one you’re buying or doing it on your own, the following information will give you a leg up. Stay informed and make sure you make your dollar go as far as possible.

What Is a Business Valuation?

To keep it simple, a business valuation is a process of valuing a business using various economic factors. Business valuations are often used to determine the value of the business so investors, owners or potential buyers can make informed decisions.

Why Your Company Needs an Up-to-Date Business Valuation

Having an up-to-date business valuation is important. Some experts recommend that you get a business valuation done each year.

If something happens to the business owner, having a current business valuation on hand can help the sale of the business go much smoother if the business needs to be sold. It is also helpful to have on hand if an out of the blue opportunity for a merger or acquisition pops up.

Besides these reasons, it is just good business practice to know where your business is so you can continue to help it advance to the next level.

Methods for Doing a Business Valuation

There are multiple methods in which to do a business valuation and here are some of the most popular ones. Choose the one that makes the most sense for you.

  • Discounted Cash Flow
  • Capitalization of Earnings
  • Market-Based Valuations

The discounted cash flow method shows the present value of future cash flow for a business and discounts it according to risk.

The capitalization of earnings method shows a business and its future profitability. It accounts for annual ROI, cash flow and expected value. This method only extends calculations for a single period in the future.

Market-based valuations calculate the net value of the business based on the purchase and sales of businesses that are similar to it. 

Necessary Information for a Business Valuation

When you’re ready to do your business valuation, you’re going to need to be properly prepared for solid numbers and other information about your company. If you hadn’t organized your company’s information before now — this is a good time to do it.

One of the most important parts of the business valuation is your company’s financial statements. You need to review the quarterly balance sheets for the past 3 to 5 years.

Other financials you’ll need include income statements and any obligations you have such as retirement plans, stock options, and bonuses.

Intangible Assets and How They Work in the Appraisal Process

Just because you have intangible assets, that doesn’t mean they aren’t valuable. An intangible asset is simply an asset that isn’t physical.

These intangible assets might include but are not limited to:

  • Patents
  • Trademarks
  • Copyrights

Never try to value your business without including intangible assets. Intangible assets are some of the most valuable assets your company may possess.

Adjusting Financial Statements for a Business Valuation

Another important thing to do before you hand your complete business valuation is to adjust financial statements for discretionary items or one-time purchases.

How to Improve Business Value Before the Valuation

Let’s say that you’re selling this business, you might want to improve the value. There are things you can do to increase the value of the business. On the other hand, you may have just bought a business and you want to increase its value.

Whatever your reason, here are some simple tips to make sure the business is valued at its highest possible.

The biggest things you need to work on are profitability and future earnings. If you can show that your business is bringing in profits year after year, your business is going to be very attractive to potential buyers which will raise its value.

You may even be able to use the industry you’re in to increase the value of your business. If things are looking bright in the sector your business is positioned in then your business will look like a good choice.

Another important tip for increasing your business valuation is organization. If your business records are a mess and it’s hard to make sense of them, you’re looking at a lower valuation.

Well-organized business records can help you because no one else wants to organize it either. You already know what information you have so getting things organized before you try to sell is going to increase the valuation.

If you are selling, offering seller financing is a good way to increase the value of your business. If you make the business easy to buy, the new owners will be glad to pay the price.

Learn About Business, Technology, and Beyond

Now that you understand more about the business appraisal process, why stop learning there? We have many articles on the topic of business, technology and beyond that can help you as you’re growing your business empire.

Browse our articles, find your favorite section, drop a bookmark, and come back soon for more great reads.

More on this topic:  20 Ways Technology Can Improve Small Businesses

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