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If you’ve been thinking about selling your business, you know how important it is to understand its value. Even if you’re not planning to sell anytime soon, it’s a great idea to periodically review your business’s value.

The information contained in a business valuation report can provide valuable insights that will help you position your business for current and future growth. What is a business valuation report and what type of information does it provide? Here’s a closer look at the details.

Business Valuation Reports: The Basics

First things first – what is a business valuation report? Simply put, it’s the document that describes the findings of your business valuation. This involves analyzing important facts including your business’s financial health to generate a single dollar value of the business. Depending on the purpose of the valuation, the analysis may also require a significant amount of additional documentation. 

Some of the most important information you’ll find in a business valuation report includes:

• Industry and economic trends – external factors that affect the company’s potential risks and future cash flow predictions.

• Financial analysis – an in-depth look at the company’s past financial performance and a forecast of future operations or, at a minimum, the company’s expectations of the future. 

• Valuation methods – this may include a variety of methods like market capitalization, times revenue, earnings multiplier, discounted cash flow, book value, or liquidation value.

• Discounts and other considerations – some situations, like marketability or lack of control, may call for discounts to the business valuation. If so, the report should explain the impact of this in detail. 

If you’re preparing for a business sale or applying for financing, you’ll typically need a thorough report provided by a professional appraiser who has in-depth knowledge about how to value a business. This is a time-consuming process that requires business owners to provide a large amount of information. However, if you’re using your small business valuation for informational purposes, there’s no need to go through a full business analysis. 

GrowGrade’s tool is quick, free, and simple to use. Our online valuation tool is specially tailored to small businesses. It requires as little as one year of financial data and only uses information found on your tax fillings.

Why Are Business Valuation Reports & Updates Important?

A business valuation report provides an accurate analysis of what your business is worth today. More importantly, though, it helps you understand how to determine the valuation of a business. Once you’re familiar with the factors that support and drive your business value, you’ll be in a better position to assess your business opportunities and uncover potential red flags.

Business valuation reports are also valuable for a variety of purposes including personal estate planning, retirement planning, determining your insurance needs, setting up incentive plans for your management team, and setting up buy/sell agreements.

Taking a Deeper Dive into Your Business Valuation Report

While GrowGrade’s valuation is to the point and easy to read, some certified business valuation reports are 100 pages or longer. Unless you’re a financial guru, interpreting them can feel like a major challenge. While it’s worthwhile to review the entire report, some key points to pay attention to include:

• Valuation table – this is typically found near the end of your report. It shows the value of the business and the business valuation methods used to reach this conclusion.

• Summary of approaches – this discusses the various valuation methods and shows how each business valuation formula affects the final business value. It should also explain why any method(s) were chosen over the other options.

• Normalizing entries – this explains any adjustments that were made to account for unusual events, expenses that aren’t currently at the market rate, and other abnormalities. 

• Discount rate summary – if the adjuster used a discounted cash flow or capitalized income method, this chart will show the rates that were used in the valuation. You should review this carefully to make sure you agree that they are accurate. 

• Business valuation summary – shows how assets and liabilities impact the business value.

Your business valuation report may also, and really should, analyze your company’s place within its industry. This competitive analysis helps you learn more about your top competitors and the products and services they offer. It’s a common misconception that competitive analysis is reserved for large corporations. While the competitive analysis conducted by a corner store will look different than that of a Fortune 500 company, it’s no less critical for the corner store to be aware of its competition.

How Business Valuation Aids in Decision Making

If you want to grow your company’s current and future value, start by reviewing your business valuation report. This will help you identify areas where you can maximize sales growth and implement cost-cutting strategies to increase your profits. You can also use this insight to help you increase employee retention, significantly reducing your hiring and training costs.

By understanding your past performance and future outlook, you’ll be able to put yourself in the best possible position for continued growth. Having a new business valuation report run every few years will help you see how your company is growing over time. It will also allow you to establish a track record of success. This is valuable for everything from requesting financing to instilling confidence in your leadership team.

Finally, and perhaps most importantly, having a full understanding of your business valuation will help you develop systems and processes to increase the chances of a successful future business sale or ownership transition.

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