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Business Valuation and Why You Might Need to Get One

Comparables valuation

If you have a small business that you have built from the ground up or have taken from fledgling to profitable, then having a small business valuation done can be something that you might take quite personally. That is understandable. You have put a great deal of your personal energy into making it what it is now.

A problem comes into play when you need to sell your business and you need a small business appraisal. If you are not careful, the entire process of valuation can easily become derailed when it is based on personal emotion, attachment, and subjective ideas rather than quality data that is based on the realities of the market.

In the exact same when residential properties obtain their actual value, so, too, do businesses obtain their value and the way value is determined is by what a buyer is willing to pay for it. In the end, that is really the only criteria.

At the same time, a seller wants to present the business in a way that leads the buyer to understand its worth to them. That is where a small business valuation comes into play. A solid business appraisal valuation, small business comps, and a valuation market approach are a few of the tools that are used when setting your business up for maximum value.

It is important to remember that business value isn’t absolute. The entire process is about measuring the worth of your business. The way this is managed is by determining what the standard of value is for a business like the one you own and what that premise of value actually is. Another way to think about this is to determine how a business gets valued–what type it is and where it is located–and under what circumstances you are getting a small business valuation–why you are selling or how the economy is performing, etc..

At the end of the day, a small business valuation–like all business valuations–is about the economics of your business. Financial information is a very big key to the puzzle. You will need to have financial statements that cover your income for roughly three to five years and a balance sheet to show your profits and losses.

Essentially, it all boils down to this: how does your small business compare to recent sales of similar businesses, what is the earning potential of your business, and what are your assets.

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