Knowing what your business is worth is invaluable. Before you take advantage of valuation advisory services, you’ll need to collect three basic pieces of information that are used in a small business valuation formula. First, you’ll need cash flow analysis reports. Second, you’ll need to identify your assets. Third, you’ll need a comparative analysis of the selling prices or stock values of like companies.

Business valuation advisory is beneficial for a number of reasons:

1. If you’re thinking of selling your business. Valuation advisory services can help you pinpoint a fair selling price.
2. As a measurement tool to help grow your business. A valuation advisory indicates your company’s current worth, which can help you set goals and find opportunities for growth.
3. To be prepared for problems that may arise. Small businesses and partnerships are especially vulnerable when partnership issues or marital dissolutions occur so hiring valuation advisory firms to figure out your business value prepares you for divvying up assets.
4. To attract investors. Before anyone will invest capital in your business, they’ll expect you to have had a valuation advisory to know the company’s worth and its financial outlook.
5. When regulations mandate valuations. If your company is publicly traded, regulations require a periodic business valuation advisory.
6. To use as a comparative tool. Hire business valuation advisory services to find out where your company stands financially compared to competitors.
7. To establish an ESOP plan. In order to let your employees share ownership in your business, you’ll need to use business valuation advisory services to figure out percentages of ownership.
8. To enable you to make fast decisions on buying, selling and mergers. If an opportunity presents itself to buy, sell or merge your business, you’ll need to move quickly while the offer is fresh. This isn’t the time to look for business valuation advice.

Action Steps
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Choose valuation advisory software for help calculating business worth

With a small business, you can often take the DIY approach to finding your company's value thanks to business valuation advisory software. Before you purchase valuation advisory software, find out how detailed the reports are and what information you'll be required to input for results.

I recommend: MoneySoft makes Corporate Valuation Professional software, used in business valuation advisory by financial valuation advisory companies and valuation accountants to create financial analysis, detailed projections, graphing and report writing functions. MBAWare offers multiple software applications to assist you with your large or small business valuation formula. Express Business Valuation provides a simple 19-step formula to accomplish the business valuation process. Business Valuation Report Writer assists you in creating a valuation report from your existing financial spreadsheets. ValueAdder software is a good choice for small business owners who want to write viable purchase proposals to sell their businesses. For more vendors, check the Business.com directory for valuation advisory software.

Find valuation advisory consultants to help you with the process

If you are doing a business valuation in order to sell your company, attract investors or start public trading, you'll need a very detailed valuation report. The best option is to hire one of the many valuation advisory consultants that specialize in your specific industry. Hiring valuation advisory consultants can be pricey, but well worth the investment when accuracy is key.

I recommend: Erickson Partners specializes in helping energy, real estate holding companies, insurance and high-tech firms to appraise their company’s worth. Fair Market Valuations has more than 250 locations nationwide and brokers who will come to you to perform valuation advisory services. After the business valuation is complete, they also offer brokerage services to take your business to the market stage. The American Society of Appraisers database allows you to search for valuation advisory consultants by geographic location. A listing of valuation advisory consultants is also available at Business.com.

Use online tools that provide business valuation advisory services

Another way for small businesses to save money from hiring expensive valuation advisory consultants is to take advantage of their experience by using online tools they've created.

I recommend: C&S Associates offers online business valuation advisory tools to assist you in the business valuation process. The five different levels of tools are based on what you need and why you are performing the valuation advisory. Woodbridge Group Inc. offers an online free snapshot valuation of your business based on your basic financials.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  A valuation advisory can be a good tool to provide to a board of directors, investors or partners--especially when profits are down. Showing the value of the business may boost morale and allow you to refocus your business goals.
• •  You may think you don't need valuation advisory services because you know your company's worth based on your yearly tax return and financial statement. But most businesses try to expense as much as they can to reduce taxes, so the financial snapshot from these documents isn't a true picture of your business's worth.
• •  Decide which small business valuation formula you will use. Valuation approaches include asset, income, market comparable and other approaches.

When a company decides to use a business valuation for acquisition model, it is important to conduct a thorough fiscal investigation. Typically, a company acquisition valuation relies on growth expectations, future cash flows and tangible cash assets on hand. While no model is perfect, to attain these figures for the business acquisition valuation you can either use asset-based, balance sheet, debt assumption or earnings and cash flow methods.

What makes this process of business valuation for acquisition so difficult is that every company is different and the marketplace, over which you have no control, is a prime determinant in valuation of a business. Therefore, there is no similar valuation with which to compare your potential acquisition. The most accurate measurement is to follow the methods used by others and not rely on one source for this information. Given the previous information, it is important to consider the following when you calculate a business valuation for acquisition:

1. Understand the methods used to calculate a business acquisition.

2. Choose the method to determine the potential valuation of acquisition.

3. Contact an independent business valuation for acquisition specialist.

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Evaluate the various methods on how to value a company acquisition

When your business purchases a tangible asset like a copier or computer, there is a set value and no valuation models are necessary. However, when you employ a valuation of an acquired business model, there are too many factors for there to be a set value. This is where the various valuation methods can help approximate business value.

I recommend: Register and take the online value of business acquisition course from the New York Institute of Finance. Review the most common methods to value of business acquired. Download the free podcasts available at bvresources.com. Consider purchasing the various software packages from MBA Ware, which can make the valuation process much easier.

Select the method to determine the business acquisition valuation

After a thorough review of every available valuation method, it is now time to select the most accurate model.

I recommend: Examine the many articles and publications on business valuation at Valuationresources.com to help you choose a valuation method. Use the valuation calculators to determine the valuation method.

Employ the services of an impartial firm to calculate a business acquisition

Because of the complicated nature of how to value a business acquisition, it is in the best interest of your company to use an outside firm to give you another valuation perspective.

I recommend: Call the acquisition specialists at Empire State Consultants for independent business valuation. Contact the HSSK business valuation group for a comparison to your business valuation figure.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Because no business operates in an economic vacuum, it is important to examine the profitability of the industry in which a potential business acquisition operates. The business acquisition may seem like a sound investment, but if it operates in an industry with diminishing opportunities, the business could a potential problem in the future.

There are a variety of methods for business valuation, or determining the value of a business you want to purchase. Among them are the book value, transaction multiple, and discounted cash flow methods. These methods are designed to determine the value of the business being acquired, but the synergy created when the two businesses are joined can also have value. The synergy helps determine the premium you should pay to buy the target. Finally, conducting a scenario analysis will help to find the appropriate price to pay for the business under a variety of situations. Here are some key terms to get you started.

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Book value

The book value of the firm is the accounting value of the firm's assets, net of liabilities, as shown on the balance sheet. In other words, to value full ownership of the firm, one need only look at the historical cost of the company's fixed and current assets, and subtract from that the money owed to creditors. Book value may not be very accurate, especially for old firms, or firms that are not very capital-intensive.

I recommend: Check out this article by The Motley Fool for a discussion of book value.

Discounted cash flow

The discounted cash flow method of valuing a firm is very useful, but it also requires the most work. To use the discounted cash flow method, you first have to forecast the firm's future cash flows, and then calculate how much those cash flows are worth today. Because forecasting is subject to error, discounted cash flow should be paired with scenario analysis to get a very good sense of the value of the firm.

I recommend: This article by Investopedia has a good explanation of discounted cash flow.

Transaction multiple

The transaction multiple method is a relatively straightforward method of determining the value of the firm you want to acquire. In this situation, you simply find businesses similar to the one you are interested in buying, and figure out what was paid for those businesses as a multiple of the their net income, for example. Then, you apply that multiple to the business you are looking to buy and calculate the purchase price.

I recommend: bNet has a discussion of the transaction multiple method and several things to be aware of in its application.

Synergy

Synergy is the value created when two firms merge and the value of the new merged firm is greater than the sum of the two old firms. This can be a hard value to calculate, but when choosing among a few firms to acquire, you should try to find the one that will create the most synergy with the business you already own.

I recommend: MotivatedEntrepreneur.com has a good discussion of synergy.

Scenario analysis

In scenario analysis, you estimate various values of the business you want to acquire under different circumstances. This allows you to develop a range of business values. If the low end of the range is still a desirable value, then that helps to ensure the business is a solid acquisition.

I recommend: InvestorDictionary.com has a brief article explaining scenario analysis.

Acquisition premium

The acquisition premium is the amount paid, over the value of the target firm, in order to purchase the firm. Usually the acquisition premium reflects the synergy expected, so the higher the synergy expected to be created, the higher the premium the acquiring firm is willing to pay.

I recommend: Dictionary.com provides a definition and commentary on acquisition premium.