Business Valuation - General Differences Small and Large Businesses

Obviously, there are numerous differences between large businesses and small businesses. This is true whether the business is a manufacturing company, a wholesale or retail concern, a service firm, or a professional practice. And these differences affect the business valuation / Business Appraisal of these businesses. This short text will describe some of the many differences be- tween large and small businesses.

This short text will also summarize many of the ways in which these size differences affect the business valuation process. While there are noteworthy differences in the business valuation / Business Appraisal of large businesses and small businesses, these differences may be even more salient when comparing large professional practices to small professional practices. Small professional practices are sometimes principally self- employment opportunities. In these cases, it is difficult to distinguish be tween the subject professional's employment activities and rewards and the subject professional's equity ownership activities and rewards. However, in very large professional practices, it is relatively easy to dis tinguish between the professional's employment activities and rewards and the professional's equity ownership activities and rewards. Such dif- ferences are noteworthy because, in terms of the business size spectrum, professional practices range in size from single professional medical or dental practices to international accounting and law firms. However, the objective of this short text is to highlight the differences in the business valuation / Business Appraisal of small and large businesses.

Therefore, for purposes of this short text , we will group smaller commercial firms and professional practices into the category of small businesses, and we will group larger commercial firms and professional firms into the category of large businesses.

Many analysts naively apply the same set of approaches, methods, and procedures to the business valuation / Business Appraisal of small businesses as they do to the business valuation / Business Appraisal of substantial corporations. And they erroneously ignore the many differences between large professional practices and small pro- fessional practices. Because there are numerous differences between the business valuation / Business Appraisal of large and small businesses, analysts should carefully consider these differences in their selection of business valuation / Business Appraisal methods, their application of business valuation / Business Appraisal procedures, their search for and analyses of transactional data, and their synthesis of value indications to reach the final value conclusion. In fact, the recognition of the appraisal subject as either a big business, a small business, a large professional practice, or a small professional practice is an important initial step in the business valu- ation process.

There are three principal categories of differences between big busi- nesses and small businesses that affect the business valuation / Business Appraisal process:

 (1) operational differences—meaning the way businesses are organized (from a legal, taxation, and business formality perspective), the way businesses account for their transactions, and they way businesses finance themselves;

(2) transactional differences—meaning the way that such businesses are actually bought and sold in their respective transactional markets;

 and (3) market dynamics differences—in the data (in terms of both quantity and quality), methodology, and analyti- cal factors that are involved directly in the business valuation / Business Appraisalprocess. It is important to note that there are not formal business valuation / Business Appraisal rules that recognize the differences between—and the definitions of— big and small businesses. Indeed, in terms of the above-mentioned three categories of differences that affect the business valuation / Business Appraisalprocess, not all big businesses are the same.

Likewise, not all small businesses are the same. Experienced analysts do, in fact, consider the fundamental differ- ences (operational, transactional, and market dynamics) in their busi- ness business valuation / Business Appraisalanalyses. So, in one respect, this discussion is directed more to the users (as opposed to the preparers) of business valuation / Business Appraisal analyses.