The business valuation process determines the worth of a business which is important for many reasons. It is a prerequisite for selling a business. Business valuation is critical for gaining the attention of investors and buyers.

There are different methods followed by business valuation firms to decide the value of a business, and the factors that influence the valuation also depend on the size of the business and the purpose of valuation.

Here are key factors that influence small business valuation at the time of sale.

1. Sector Position

This is the most difficult factor to control. The sector of the business and its market position are extrinsic factors. For a fast-growing sector, the value of business will be greater and if the sector is waning the value will not be attractive. This factor decides the potential of the business to grow in the future. Thus, a business model with high growth potential could increase the value of a business.

2. Detailed and Updated Documents

This is an intrinsic factor that can increase the value of a business. The availability of detailed and updated documents is undoubtedly a valuable asset.

3. Human Resources

The people associated with a business are also a key factor in determining its value. A skilled staff and reliable management team can influence the valuation of a small business at the time of sale. It decides the kind of employees the buyer will be inheriting from the purchase of the business.

4. Reputation

The reputation and goodwill of a business can be incredibly valuable. Although it is difficult to give a numeric value to this type of intangible asset, the reputation of a business is incredibly important.  While a positive reputation can significantly boost the value, a negative reputation would be detrimental.

5. Income History

The earning history of a small business is especially a major factor in valuation. The prospective buyers will likely look at the income trends.

For instance, an upward trend in income over the last 5 years will positively impact the valuation of a business, while any drop in the income may devalue the business.

6. Location

Location may be a major factor for specific business types such as real estate. Even if you have an innovative business idea and fantastic business idea, the location doesn’t have much scope for growth which can have an impact on the business valuation.

Conclusion:

Estimating the value of a business is not only important if you are planning to sell your business, but it can also be a valuable exercise to track your progress over time. There are a number of valuation methods followed for business valuation for investors or buyers. Each method uses different variables to determine the value of a business, which can be income, assets, or market data.

When you are buying or selling a company, there are also numerous factors to consider that decide the value of a business. Kapso is your one-stop partner to assist you with acquisition, evaluation, and fundraising requirements.