SME business valuations are less straight forward and more tedious to determine because there is no current market value associated with it. Unlike a publicly listed corporation like Apple or Exxon Mobil, there is no stock exchange that have continuous price discovery (during trading hours). In fact, it takes longer and is harder to sell the shares of a small medium business than a public listed one because there is no open market.
Without audited accounts that are publicly available and the continuous price discovery of the stock market, small medium business valuations have to rely on other available information.
an opinion of value is formed using 3 different approaches: Income, Market Data, Asset
SME business valuations require adjusted or normalized financial statements which are stripped of business owner compensation and benefits. With these adjusted statements, an opinion of value is formed using 3 different approaches: Income, Market, Asset. With the combination of 8 different methods using these 3 approaches, the final weighted average opinion of value is then determined.
While there may be no “spot” price (a price at which there are multiple buyers) of private companies, the above mentioned methodologies have advantages of their own. Many small medium business owners may have believed that their business has no value because the company has little or no profit because they paid themselves most of the profit. The good news for them is that for small business valuation, the owner compensation and benefits are added back to profits for evaluation.
The SME business valuations are subjective in nature but requires a person with the trained technical background and experience,
The private company valuation is subjective in nature but requires a person with the trained technical background and experience, such as a Certified Business Intermediary, to be able to find a price that achieves the objective of the owner. Which is to sell the business.
The price of a business is not what a business owner feels it should be, but what available buyers at that point in time (who requires a return on investment per risk level) is willing to pay, given compulsion by either or both the parties.