Summary
There is a tremendous need for the valuation of small businesses. Oftentimes, small businessowners do not have the wherewithal to gather the data and keep it up to date for use in situations that require valuation. Formal valuations are necessary because they provide objective evidence of value, in contrast to value set by markets on which public companies are traded. This article focuses on some factors that impact the valuation of the business and will help small businessowners feel more comfortable talking with financial professionals about how the business might be valued.
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Preparing Your Business for Valuation
Whether for tax, legal, or business reasons, there is a tremendous need for the valuation of small businesses. Oppressed minority shareholder suits and equitable distribution actions are the most common legal reasons for valuations, while purchases and sales of companies are common business reasons. Oftentimes, however, small businessowners do not have the knowledge or the wherewithal to gather the data and keep it up to date for use in situations that require valuation.
Small businesses are usually controlled by few people and shares of stock are not regularly traded on any exchange. Nevertheless, formal valuations are necessary because they provide objective evidence of value, in contrast to publicly traded companies where value is set by the markets on which they are traded. Owners often develop expectations concerning the value of their company by utilization of "Thumb Rules," such as a multiple of gross fees, a multiple of the number of hotel rooms, or a multiple of the number of seats in a restaurant. These approaches are very impre...See the full content of this document
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