Simply put, business valuation refers to the process and the set of procedures employed to determine the economic value of a business.
While it is unfortunate to note, many business owners have an unrealistic idea as far as their company’s worth is concerned.
This is not surprising as according to a Harvard Business Review article, research indicates that people often attach a higher value to the things they own as opposed to things that are not theirs.
Taking into account the stakes and the complexity of the process, business valuations are best left in the able hands of professionals.
What are some of the approaches used in business valuation?
As the name implies, this approach will rely on signs from the market to determine the value of your business. In this approach, the so-called economic principle of competition is taken into account:
What is the worth of other businesses similar to mine?
Understandably, if you are looking to buy a business, you would need to check the “going rate” for that business type before taking the plunge. If you are planning to sell your business on the other hand, you will obviously need to check the market to get an idea what similar businesses are worth.
This approach takes into consideration the assets and liabilities in order to come up with a clear picture of the value of the business. Sure, this may sound simple but this approach can be a bit tricky. The challenge often lies in the details—what assets and liabilities should be included, determining the worth of each, and picking a standard when it comes to measuring value, to name a few.
The income approach will not only take into consideration the money the business is likely to bring but will also take into account the risks. While businesses have projected profits or revenues, there is also the risk of getting only a part (or none at all) of the projected returns.
What are some of the peerless benefits of business valuation?
You will get a clearer idea of what your company is worth. Many entrepreneurs do not have the slightest idea what their business is worth. Others who assume they know often end up realizing they made the wrong assumptions. If you want an independent, accurate, and unbiased opinion, hiring a professional to perform the business valuation is the best way to go.
You will have a better insight of the company’s financial condition. Most business owners often think they fully understand the financial health of their business. However, keep in mind that making wrong business assumptions can be costly. That being said, it is in your best interest to have an independent analysis and review done so you will have an accurate insight into the company’s current financial standing.
You will be able to make faster decisions when it comes to selling, buying, and mergers. If you are considering selling, buying, or getting funding for your business, a business valuation can help you decide faster and strike while the iron is hot so to speak.
You are able to better understand where your company fits in the business landscape. Business valuations will provide insight into your specific industry and will give you an idea of your industry’s current competitive landscape. You will also get information as to the market price of companies that are publicly traded and are involved in your line of business.
It helps you stay current. Without doubt, the market is very dynamic and is constantly changing. In line with this, consider it a must to have routine business valuations done especially since the economy, industry, and your company will be evolving continually.