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Many owners of small businesses understand their operations inside and out. However, they rarely know one vital fact - how much their company is exactly worth in the open market. Measuring the true value of a business, a process known as "business valuation," is not just essential when the owner is looking to sell the company. It's also necessary for other reasons such as business succession planning or when the IRS needs to know the value of the business.

 

The objective of business valuation is to arrive at a clear and supportable estimate of what the fair market value of the business is. Fair Market Value refers to the price at which the property will change hands between a willing buyer and a willing seller, where neither is under any duress to buy or to sell and both having a prudent knowledge of pertinent facts. Here are some of the reasons why business valuation is important before you can sell your small business.

 

More Profitable

 

Although most business owners only start wondering how much the business worth when there is an offer on the table, it is actually very profitable to have one's business valued on a regular basis, such as every five years. In fact, a complete and stringent evaluation may take a period of 5 to 7 weeks. In case a quick transaction is necessary, knowing the value of one's business lets a business owner have a realistic basis when negotiating with the buyer. Business valuation is especially vital in the event of any business transfer, whether small or large.

 

Sound Investment Decision

 

Having a complete knowledge of the essential value drivers of the business, its future cash flow generation capability, risks associated with generating future cash flows, an objective peer comparison of performance, the capital structure of the business, relevance in the industry, liquidity of the shares transacted, and synergies to the buyer and the seller is essential. Knowing your business's worth will enable it to be an objective reference point between you and a potential buyer during price negotiations. To know more about business valuation, visit http://money.cnn.com/interactive/technology/billion-dollar-startups/.

 

Identify Strengths and Weaknesses

 

Business valuation at http://www.keystonebusinessadvisors.com/selling-a-business/business-seller-services/ provides a look into how others would view your business. This is particularly important for many small business owners. Some are so busy dealing with the daily operations of their business AND they have no experience as buyers that they are unable to objectively recognize the strengths and weaknesses of the business - the most important aspects that influence the perceived risk related the company by potential buyers.