Today’s economy can be tricky to navigate for investors. With so many start-ups appearing daily, particularly in the tech sector, it can be difficult to assess the earnings potential of new businesses. Investing in new products and services can be a risk in the volatile venture capital climate left in the wake of the dot com bust. Thus, business valuation tools have become more necessary than ever. If you’re an investor or are looking to start or purchase a new business, it’s vital to familiarize yourself with business valuation services and tools in order to best prepare yourself for today’s investment market.
What Is Business Valuation?
Business valuation is a method of financial analysis used to estimate the economic potential of an owner’s or investor’s interest in a business. Business valuation is used most often by financial market participants to gauge the amount of capital necessary for a business acquisition or investment. Business valuation is largely an economic analysis exercise. Not surprisingly, a company’s financial information provides the key information for this process. The two main financial documents needed for business valuation are income statements and balance sheets.
To do a proper job of valuing a small business, one should have 3?5 years of historic income statements and balance sheets available. The value of businesses are estimated using three main approaches: comparison to recent sales of similar businesses; assessing a business? earning power while factoring in risk assessment; and valuing a company?s assets. Above all, the two key starting points toward establishing your business worth are: determining why you need business valuation and assembling all the required information. It may seem surprising at first that the valuation results are influenced by one’s need for business valuation, but business value isn’t an absolute figure. It’s a somewhat subjective process of measuring business worth, which depends on two key elements: how business value is measured and under what circumstances. In formal terms, these elements are known as the standard of value and the premise of value. Because there are so many variables involved in the valuation process, specialized tools and knowledge are needed for accurate valuation.
Business Valuation Tools
It’s probably no surprise, but today’s most sophisticated business valuation tools are software-based. Due to the complexity of modern business valuation algorithms, these processes are most easily handled by automated software. However, consulting with business valuation experts is still a vital part of the valuation process – computers can only go so far. Knowing how to select and use your business’ financial data is just as important as choosing the right software, and experts can guide you through this process.
If you’re looking to start or invest in a new business, you need to know exactly what you’re getting into. Look into today’s business valuation tools and give yourself a head start on today’s exciting small business market.