The Importance of Business Valuation

by Zaara 19, Jan 2022

The Importance of Business Valuation

Entrepreneurs and business persons spend considerable time and energy trying to enhance business value by strengthening growth plans with well-defined goals. These plans are intended to maximize value over time, but it's hard to accomplish those goals without knowing where to begin.

What is a Business Valuation?

A business valuation gives the business owner multiple facts and figures regarding its actual worth or value in terms of income values, market competition, and asset values.

Why is Business Valuation Necessary?

The conventional answer is that valuations are needed to resolve tax or legal issues. Nevertheless, valuations are performed for many reasons, including but certainly not limited to selling or procuring a business. In the cases of disability, death, disaster or divorce, valuations are needed to equitably determine the business assets according to terms spelt out in statutory filings.

A formal business valuation can also help to reconcile perceived opinions on value. Coupled with a marketability analysis; it can help business persons determine relative importance in the marketplace.

Some of the other reasons are -

  • It permits us to forecast the true profitability of the company through "recasting."
  • It gives us a chance to review the operations of the company and prepare a roadmap to improve the business's worth for the owner
  • It gives the business owner information about the business industry value (BEV) of his/her company

Reasons for Performing a Business Valuation

Some of the reasons to perform a business valuation are as under -

Litigation

During a court case such as an injury case, divorce, or where there is an issue with the value of the business, you may have to provide proof of your organization's worth so that in case of any damages, they are based on the actual cost of your businesses and not inflated figures measured by a lawyer.

Buying a Business

Even though sellers and buyers usually have diverse opinions on the business's worth, the buyers are willing to pay the real business value. A fair business valuation will look at potential income, market conditions, and other similar concerns to ensure that the investment you are making is viable. It may be reasonable to hire a business broker who can help you with the process.

Selling a Business

When you want to sell your company to a third party, you need to make sure that you get what it is worth. The asking price should be attractive to the proposed purchasers, but you should not leave money on the table.

Funding

An objective valuation is usually needed when negotiating with banks or any other potential investors for funding. Professional documentation of your company's worth is generally required since it enhances your credibility to the lenders.

Strategic Planning

The real value of assets may not be shown with a depreciation schedule, and if there has been no adjustment of the balance sheet for various possible changes, it may be risky. Having a current valuation of the business will give you useful information to help you make better business decisions.

Conclusion

Once your company's valuation has been established, set new goals to increase the company's value over the next year. Every year, you should set time aside to compare the previous years' valuations to measure growth, losses, and notice room for improvement is. There are three main types of valuations, and companies should take benefit of the opportunity to complete all three annually.

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