Methodological challenges of valuing small businesses

Abstract

THE AIMS OF THE PAPER

The purpose of the study is to present the potential problems of applying the widely accepted business valuation methods for valuing small and medium-sized businesses. The most preferred valuation approaches have originally been optimized for large businesses, and the literature pays little attention to their application for SMEs. The current study addresses this research gap.

METHODOLOGY

The most important aim of this study is to conduct a thorough survey within the theoretical literature and the actual international professional standards. First, the author gives a detailed overview of the national and international theoretical literature and of the mostly used valuation practices, which are typically calibrated for large businesses. This is followed by the presentation of the main challenges arising when valuers start applying these methods for small and medium-sized businesses. Finally, in order to reflect the mentioned challenges, the author draws up his own concept, and indicates the further research directions. 

MOST IMPORTANT RESULTS

Both the theoretical literature and the practical standards confirm that the need to determine the value of a business is independent of firm size. The typical valuation situations (for example acquisition or borrowing) appear regularly in small and medium-sized businesses, too. The basic valuation approaches may be valid for smaller businesses, but during the practical application, valuers need to make several corrections in order to adopt the given method for the circumstances of the small business.

RECOMMENDATIONS

The information available about small businesses is much weaker than that of big firms. Therefore, in case of all valuation approaches (cost approach, market approach and income approach) it is necessary to make appropriate corrections to create the information basis of a reliable estimation of value, This study mainly focuses on exploring problems, while working out particular corrections and conducting empirical examinations are subject to further research.