Business Valuation … How it works
The greatest asset of a business is its moneymaking potential, therefore business brokers must know how to analyze financial statements provided by the owner and translate the results into estimates of value. This is known as a business valuation. Business brokers must be able to explain estimates to buyers and sellers. Brokers do not check or verify the accuracy of profit and loss statements, income tax forms, and balance sheets. Instead, they compile this financial information and present it in ways that make it more understandable to prospects.The greatest asset of a business is its moneymaking potential. Click To Tweet
The Process of Business Valuation
Brokers use the financial documents to estimate the business’ potential profitability to the new owners and the net value of its assets. Once income and asset figures have been computed, the broker can provide an opinion of value by using formulas and/or researching comparables. After calculating the basic profitability and asset value of a business, the broker estimates its market value. Commonly used methods for a business valuation include: the market, income, and asset-based approaches, and the rules of thumb approach.
To estimate potential earnings or income to a new owner, brokers review the current owner’s income statement and make adjustments to reflect the normal operation of the business. Adjustments are necessary because:
- Some expenses claimed in accordance with accounting and governmental guidelines might not reflect the current operation of the business
- Income can vary as a result of the choice of accounting technique
- Some seller’s expenses may be optional or not applicable to a new owner
The process of reviewing financial documents and making appropriate adjustments is referred to as normalizing, adjusting, or recasting. The information needed in order to adjust an income statement is typically acquired either from a business’ profit and loss statement, or from its tax return. The past three years of information are generally required, as well as, balance sheets in order to conduct a complete business valuation and potential earnings for a new owner.
About Lisa Sharp – Lisa has worked in commercial real estate since 2000 and specializes in business brokerage and commercial sales and leasing. Her experience as an owner and operator, of multiple businesses, makes her especially qualified to help clients purchase and sell businesses. Click here to read her full bio, or if you would like to contact her, you can call her at 850-434-7500, or email her at [email protected] You can follow her on Twitter at @.