When Does an SMB Need an Asset Valuation?

Your small business is operating profitably, and you’re hitting your targets for performance. The question that follows naturally is: How much is your company worth? While valuing businesses may seem complex, it’s a necessary step in understanding your company’s true value. An asset valuation for SMBs can provide owners and stakeholders with a wealth of benefits, from setting long-term objectives to planning for the company’s future.

Global market size of SMB was valued at USD 119.35 billion in 2022 and is projected to grow to USD 248.71 billion by 2031, with a CAGR) of 8.9% during the forecast period from 2024 to 2031. Specifically focusing on the SMB software market, in 2021 it was valued at approximately USD 55.86 billion and by 2032 it is expected to reach around USD 122.49 billion, with a CAGR of 7.4%.

When does your SMB need an asset valuation? As a founder you must know when your company needs to get an asset valuation. If you’re looking to learn more about SMB valuation, this article is for you.

SMB asset valuation

The asset valuation for SMBs considers a company’s assets when estimating its worth and then deducts its liabilities to arrive at the final valuation. The balance sheet can give a decent idea of how much a business’s assets, including cars, machinery, inventory, etc., are worth.

The reasoning is that if you were to recreate the identical firm from the beginning, you would have to purchase everything; thus, theoretically, the business is worth enough to cover the cost of replacing these products (think liquidation). On the other hand, companies with a good cash flow usually don’t adopt this strategy.

Check out this example to get a clear understanding of SMB valuation. Corp Tech is a software company that provides cloud storage and data security solutions. Developing new products, expanding operations, and gaining market share requires a valuation. This balance sheet provides the company’s assets and liabilities to determine its value.

At this point, you can get the shareholder’s equity / Net Asset Value for the Company from the balance sheet as shown below.

The above example provides an approach to assess the tangible and intangible assets of a small and medium-sized business.

Benefits of asset valuation for SMB

In North America, particularly the United States, SMBs contribute significantly to GDP and tech spending, accounting for nearly half of overall technology expenditures according to a study of McKinsey & Company.

If you own a small business, you should always have a valuation on hand. By getting a yearly valuation, business owners can track their company’s progress and prepare for expansion. However, there are more benefits to an asset valuation for SMBs.

• Improved Understanding of Business Assets – Business owners can determine how much to reinvest in their companies by receiving a more accurate financial number or a range of values from the valuation methods. They should also consider the possible sale price of their firm.
• Greater Company Resale Value Understanding – Most of the time, a business owner doesn’t think about selling their firm until something happens. Gaining a better grasp of its worth now will allow you to patiently build it up for a greater sale price later.

If you know how much your business is worth, you may ask for more when you sell it.

• Improved Accuracy of Firm Valuation – While a company valuation might reaffirm your findings from market research, it also offers more detailed information. If you’re in the market to sell your company, a valuation can help you gauge your performance relative to others in your field.

Also, if you want to know what to work on to make your company more marketable and lucrative, a business valuation study will tell you that.

• Increased negotiating leverage in mergers and acquisitions – If you do a business valuation once a year, you’ll have a good idea of your company’s worth and may use that information to negotiate a higher acquisition price.If the amount offered for your business is lower than its demonstrated value, you should turn down a transaction or propose mediation.

When does SMB need an asset valuation?

For several important reasons, small to medium-sized businesses (SMBs) may need asset valuation, including. Let’s look at each of these scenarios in detail.

Business Expansion and Growth

Asset valuation for SMBs is important when planning for business expansion and growth. Here are three contexts when an SMB needs an asset valuation for further growth:

• Assessing current financial standing – Knowing the worth of tangible and intangible assets can give you a clear picture of a small business’s financial health. Through routine asset valuation, SMBs guarantee that their financial statements fairly represent the value of the business, facilitating improved operational and strategic planning.
• Determining expansion feasibility – Planning for growth depends critically on knowing the assets’ worth. Asset valuations for SMBs determine whether they have the resources they need to grow or whether they need to move assets around or buy new ones. It facilitates well-informed investment decisions by pointing out possible risks or places where resources could be underused.
• Securing funds for growth initiatives – When SMBs look to raise funds for their growth plans, investors will evaluate their credibility and feasibility. When a business demonstrates an accurate valuation, it increases its negotiation power to propose its required funds.

Financial Reporting and Compliance

To make sure that financial information is consistent and easy to compare across countries, certain accounting standards, like GAAP (Generally Accepted Accounting Principles) in the US and IFRS (International Financial Reporting Standards) around the world, require that assets be valued.

According to these rules, some assets and liabilities must be valued fairly. It immediately affects the financial disclosures on future cash flows’ time, quantity, and predictability. Asset valuation for SMBs is crucial because it ensures two things:

• Accuracy in financial reporting – Valuing assets is key to ensuring that financial statements like balance sheets and income statements are correct and reliable. By correcting the asset value for depreciation and other considerations, this procedure offers an accurate picture of a company’s financial situation.
• Transparency in compliance – Precise asset valuations for SMBs improve the clarity of financial statements, offering stakeholders a clear perspective of an organization’s financial well-being. Transparency helps companies avoid fines for misreported asset valuations and is essential for regulatory compliance and the trust of shareholders and customers.

Mergers, Acquisitions, and Partnerships

When two companies decide to merge or acquire each other, the first step is to establish the target firm’s value through an asset valuation. And asset valuation for SMBs helps you do that in two ways.

• Facilitating negotiations and due diligence – Valuation is essential to mergers and acquisitions because it enables both sides to make educated judgments. A valuation is a tool for finding a reasonable purchase price for the acquiring business. Additionally, it aids in recognizing possible risks and opportunities linked to the transaction.
• Ensuring equitable agreements – Asset valuation for SMBs aids in determining the target company’s value and negotiating a fair price. It also points out possible synergies and areas that need work. Valuation is crucial for both sides to ensure the agreement is equitable and advantageous to all parties concerned.

Asset Protection and Risk Management

Understanding the worth of assets can assist companies in spotting issues like underutilization or overexposure in particular areas and taking preventative measures to fix them. Asset valuations for SMBs can do this in the following instances.

• Insurance coverage decisions – Making informed choices on insurance coverage requires periodic asset valuations. Precise valuations guarantee that small and medium-sized businesses are neither over- or underinsured. While underinsurance might cause large out-of-pocket costs or unstable finances in the case of a loss, overinsurance results in excessively expensive rates.
• Protecting business losses – Asset valuation critically depends on a company’s ability to withstand possible losses. It guarantees accurate accounting and a valuation of every asset at its replacement cost or current market value. While filing insurance claims, accuracy is vital because it affects payment and business financial recovery after an occurrence.

Exit Planning and Succession

Knowing the company’s worth makes making strategic decisions, including selling, passing on to family members, or considering various exit options, easier. It considers all operational, financial, and market aspects, giving a fair assessment of the company’s value. Let’s look at the specific uses of asset valuation for SMBs in exit and succession planning.

• Understanding true value – The company is often the biggest asset and the main source of revenue for SMB owners. Accurate asset valuation impacts decisions on retirement, wealth diversification, and financial planning. It helps owners determine the fair market worth of their firm using discounted cash flow, market value, and asset-based methodologies to guarantee that any exit strategy or succession plan represents true value.
• Facilitating smooth transitions – Asset valuation for SMBs helps ensure that all parties have an open and agreed-upon valuation by offering a standard for discussions with possible purchasers or successors. This is essential to prevent disputes and ensure the owner can optimize returns.

Seek Eqvista’s SMB Valuation Services Today!

Effective asset valuation guarantees that SMBs have up-to-date, accurate financial information, improving compliance, decision-making, and overall strategic planning. Adoption of cloud-based solutions and advanced technologies, such as artificial intelligence and data analytics, is driving growth in the SMB sector. These technologies enhance productivity and decision-making capabilities for small businesses.

With cutting-edge technology, Eqvista offers complete valuation services, ranging from basic company assessments to complex analyses like 409A valuations and cap table management. Through development stages and changes, our technology helps companies guarantee accurate valuations that comply with current legal requirements.

By incorporating our expert services, small and medium-sized businesses can better manage their finances and make choices that align with their long-term strategic goals. Contact us now for more information on asset valuation for SMBs!