Business Valuation Blog | Understanding Buying / Selling a Company

When it comes to business valuation, small businesses can sometimes be a special case. Because of how they're operated, marketed and maintained, there are a lot of differences compared to larger companies. But exactly how are they different and what difference does it make when it comes to performing a business valuation? Knowing how to value a small business can help you determine where to focus to improve your company's operations. Here's a quick look into the process and the differences that happen when small businesses are valued.

What's different when you need to know how to value a small business?

Because of the size of a small business, many owners don't see the true potential of their company's value. They often see their business as little more than the value of the collected parts. For a restaurant owner, that may be the value of the equipment and location. But where they often sell themselves short is in terms of community goodwill and overall reputation. Let's look at an example.

Two restaurants both set up shop. One is an average cafe with boring decor, inexpensive prices and standard fare. The other takes the time to develop a western theme, a menu that is unique and friendly staff that help build the overall experience for the customer. Even if they spend about the same amount of money getting set up, the second restaurant will almost always sell for more, because they've developed a following and a reputation for innovation in the market. Their food and the experience is unique, and it's one that brings loyal customers back to the table time and again.

When these restaurants are being valued, the simple cafe may focus on the value of the equipment, while the themed restaurant takes a broader approach to value. The income of each restaurant could be projected into the future to determine the business' overall value, but would probably also reflect a wide difference between the two, probably favoring the themed restaurant which may have a higher level of profitability.

Though some larger companies are based on the public sale of similar businesses, this market-based approach may or may not be appropriate to the small business. Neither restaurant will compete with national chains, but that's not why they've been started. The themed restaurant may be able to be compared to a certain extent to the sale of a single national chain franchise, but will also have differences in terms of separate advertising and marketing demands, differences in fare demanded by the national chain for the sake of uniformity across its menu or operational differences influenced by local suppliers, profitability and similar issues. For these reasons, it's very important to be open to a range of valuation options for a small business.

Small businesses present unique challenges to the business valuation process, partially due to their structure, community goodwill and unique approach to management. If you're considering having a small business valued, you'll want to make sure you work with a certified business appraiser who has experience working with small businesses. That helps ensure they'll know how to value a small business properly. Certification ensures the methodology used in estimating the business' value will stand up to scrutiny in legal, tax agency, financial and insurance circles.

When you're working hard keeping your company going on a daily basis, figuring out how to value a small business often falls to the back burner in the chaos of normal operations. But if you don't include business appraisals as part of your regular financial checkup, you may be missing out on valuable insights that can help you expand or improve your business. Here are some details on how business valuations help you make excellent decisions and improve your overall financial outlook.

How to Value a Small Business to Improve Your Financial Outlook

Let's start with the basics. What exactly is a business appraisal? In the most simple terms, a business appraisal looks at your entire business to determine its value. But in practice, it is actually significantly more complex. It's not just a fast look at last year's tax paperwork and a balance sheet. Here are some of the aspects that are taken into consideration during a business valuation:

• What condition is the market in? If the market is undergoing a period of growth, your business value may have increased without having to do anything to make it happen. Similarly, if it's in a downturn, you may be losing value without realizing it.
• Has your business developed goodwill? Many businesses don't take that value into account when trying to determine what their business is worth.
• What other aspects can impact your business' value? If you are located in a prime business area, have a reputation for excellence, have a unique approach to dynamic innovation in your industry or otherwise have extenuating circumstances, your business may not be valued properly without an expert business valuations specialist.

But what else can you learn from a business valuation? You can find out where your business is strong and where it is weak, allowing you to take advantage of your strengths while improving weak areas that could be a liability down the road. You can discover innovative new approaches that businesses in your industry are undertaking to ensure you remain competitive. 

What stage is your business in? Are you still building it and need to know what your assets and equity are worth to grow your business? Are you considering a merger or acquisition of an outside business and need to know where both businesses stand to negotiate a fair offer? Are you getting ready to retire and need to know how to strengthen your business' value on the market to carry you through your golden years? A business appraisal helps you position yourself for a better financial future.

Now that you know a little more about how to value a small business, you can get a better feel to where your business is and where it needs to be improved.