If you’re a small business owner, the topic of business value probably doesn’t come up too often.  You usually are able to guess what your business is worth for your own benefit, but if you’re considering making any changes to your business then you probably need to consider a small business valuation.  You should research and find a reputable business valuation firm or business appraiser that is able to tell you exactly what your business is worth and have those numbers hold up when the time comes to make those important business decisions.  You don’t really need to know much about the process involved in small business valuations, but you should be clued in to a few key items.

There are three different things that are taken into account when an appraiser is trying to value your business.  The first is the income approach, which takes the current value and prospects for future growth in value into account.  Next, the market approach is considered, which is when the appraiser looks at the guidelines and typical numeric data to compare a company to others of its kind that have been sold in the past.  Last but not least, the appraiser will take the asset approach, which is when the company’s assets and liabilities are all factored in to the value figure.

There are some discounts that must be applied by appraisers when conducting a small business valuation.  The two most common ones are lack of marketability and lack of control discounts.  There are also other things like marketability, voting rights and portfolio that can warrant discounts in valuations.

An appraiser must usually take two different standards of value into account- fair market value and investment value.  Fair market value just means how much a hypothetical buyer would be willing to pay you if you were selling your business and there were no strings attached on either side.  In a perfect world, business transactions and exchanges would always go smoothly but unfortunately, sometimes there are complications.  Some appraisers will account for this margin of error in their values while others prefer not to.  Investment value is when they include current market investment requirements or expectations and take that figure into account in the appraisal as well.

You don’t need to know a whole lot about small business valuation, because that’s what you’re paying a professional to do for you, but it helps to have a little basic knowledge such as the information given in this article.