A Business Valuation is a process that is used to arrive at the Fair Market Value (FMV) of a business.
FMV is the amount at which a business would change hands between a willing Buyer and a willing Seller when neither is acting under compulsion, and when both have reasonable knowledge of the relevant facts.
Factors of FMV
There are many factors to consider in arriving at the FMV, including:
- Profitability: Earnings and cash flow trends, variability and forecasts.
- Industry Knowledge: Understanding the trends and developments specific to the industry the business is part of.
- Marketability: How much have similar businesses sold for, and supply/demand considerations in the business transaction marketplace.
- Asset Base: What assets are required to operate the business and how can the assets be financed?
- Barriers to Entry: How easy is it for new competitors to compete with the business?
The Business Valuator
The starting point for most business valuations is engaging a professional to do the valuation. When you’re choosing a business valuator, consider these questions:
- What are the valuator’s credentials and training?
- How much of the valuator’s time and resources are devoted to business valuation?
- How long has the valuator been performing valuations?
- Does the valuator work alone or as part of a team when conducting valuations?
- How much will it cost, and is there is any commitment on the business owner’s part as it relates to listing the business for sale with the valuator?
Your business valuator will require this information to provide an accurate picture of your business. How quickly they can provide the valuation report to you depends on many factors, including how long it takes you to provide information and responses to questions. As you begin the valuation process, make sure you are committed to responding to the valuator on a timely basis.
What You Need
Owners should generally be prepared to provide:
- Five years of accountant prepared financial statements and current year financial statements.
- Premises information, meaning the lease (if rented) or BC assessment (if owned).
- Material agreements, such as franchise agreements, equipment leases, financing agreements, etc.
- List of furniture, fixtures and equipment.
- Completion of a business analysis questionnaire and prompt attention to follow-up questions.
Once the information is provided to the valuator, the valuator will assess the information and provide a report indicating the business’ FMV, so you can understand what your business is worth on the market.
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