What is a Business Valuation?

Can you objectively evaluate all the effort, time, and labor you’ve put into building your business? It’s probably going to be difficult, especially considering the years that many have spent working on the success of their enterprise. However, if you’re thinking about making mergers and acquisitions, tax purposes, etc., you need to have your business evaluated. At such times, services performed by an outside expert can help you.

What is a business valuation?

Business valuation is the process of examining the real worth of a company or an asset. This process is conducted with the help of technology. Valuation experts look at the management of the business, the potential profitability of the entity, its current market value, and its equity structure.

Valuations can also be conducted in the process of estimating the worth of a security, which is linked directly to the price a buyer is ready to spend, but only if both parties are involved in the transaction.

When securities are sold, sellers and buyers form the value of bonds and stocks. But intrinsic value is determined based on a company’s potential earnings, which has nothing to do with the market price of a security.

Reasons for business valuation

Business valuation is a great opportunity for a company to improve its business. Below we will provide the main reasons for conducting a business valuation:

  • Trust

Hope for the best, prepare for the worst, that’s the only reason to call it. No company is immune from a possible litigation. A business valuation can greatly help your company if you ever have to provide evidence of your organization’s value.

  • Planning an exit strategy

If you have decided to sell your business, the underlying value of the company will come in handy more than ever. Once that value has been determined, you can begin to develop a plan to increase your company’s revenues to increase its value and sell at a higher price. An exit strategy should be developed well in advance of the exit process itself.

By conducting a business valuation with annual updates, you’ll always be prepared for unexpected sales, and you’ll always have an up-to-date market value of your company on hand

  • Buying a business

Generally, sellers and buyers have different concepts of business value, but buyers are willing to pay for real value. With a buyer’s hindsight, a business valuation will help to understand whether an investment in a particular company is prudent, whether it has prospects since both market conditions and the potential income and various risks of the selling company are taken into account during the business valuation.

  • Business valuation

On the buyer’s side, a business valuation ensures that they get exactly the amount for the asset that they deserve. Of course, the price should be acceptable to the buyer as well, but you shouldn’t be left with anything.

  • Strategic Planning

A business appraisal helps you make wiser decisions, as nothing else can show you the real value of assets or risk opportunities in such detail.

  • Financing

Often, a business valuation is done because a company is dealing with potential investors, hammering out financing for their firm. If you provide your partners with a document of your organization’s value, it will greatly increase your credibility in the eyes of lenders.

Business Valuation Methods

There are three main methods by which a business is valued:

  • Asset-based method – sums up all investments made in the company
  • Gain method – valuation based on potential future profits
  • Market value methods – valuation based on recently sold similar businesses
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