While the current presidential debates continue to argue and disagree about the current state of the nation’s economy, the business sector itself still keeps moving along. In what may seem like an attempt to argue with itself, the numbers continue to go up in one area nearly as quickly they go down in another. In fact, approximately 543,000 new businesses get started each month. And while this number may seem initially impressive, it is important to understand that even more than that shut down at the start of each month. A breakdown of the employee firms that at least initially survive include the following:
- 70% of new employer firms survive at least two years
- 50% of new employer firms survive at least five years
- 30% of new employee firms survive at least ten years
- 25% of new employee firms stay in business 15 years or more
As businesses both begin and end, many of the owners of these businesses need to know the valuation of their companies. Some need to understand these comparable valuation numbers so that they can carry the proper amount of insurance; some need to understand the small business valuations in order to make sure that they are neither over or under valued; and some need the business valuation numbers so that they can sell their business.
Though the reason for seeking a business valuation analysis may be different for each customer, it is always a business valuation firm that can determine the numbers. In their efforts to making the analysis, a business valuation firm will use one of three approaches:
- valuation market approach
- valuation income approach
- valuation asset approach
The business valuation process is basically an economic analysis exercise. Obviously, company financial information provides key inputs into the process. The two main company financial statements that are needed for any business valuation process are the income statement and the balance sheet. To insure the most accurate job of valuing a small business, the business valuation firm should have at least three to five years of past income statements and balance sheets available.
An explanation of the three approaches an business valuation firm might use is an introduction into the entire process.
Valuation Market Approach Using comparable numbers of firms with similar numbers of employees and other characteristics the valuation firm can assess a value based on comparison to recent sales of similar businesses.
Valuation Income Approach Based on the business? current earning power and risk assessment, a valuation firm can asses the value of the business.
Valuation Asset Approach Using the books of the company, the valuation firm of is able to create a valuation number by totaling the assets of the company.