Simply put, business valuation is the set of processes and procedures utilized to gauge the economic value of a business.
Albeit it is unfortunate to note, not all business owners have a realistic idea when it comes to their company’s economic worth.
However, the aforementioned premise is not really surprising.
Some research indicates that people (business owners included) tend to put a much higher value to things that belong to them compared to those that belong to others.
Fortunately, this is where business valuation can come in handy.
The importance of business valuation cannot be overemphasized.
While the number of reasons can be infinite, below are some of the key ones:
- It gives you a clear idea of your company’s worth.
Fact: many entrepreneurs do not have a crystal clear idea of what their business might be worth.
Those who assume to know might be in for a rude awakening.
The truth is, an accurate, independent, and unbiased opinion can only be provided by a business valuation professional.
If you are contemplating getting the services of one, then consider it money well spent.
- It will give you a much better insight of the company’s current financial standing.
Majority of business owners are guilty of assuming they fully grasp their current financial situation, whatever it may be.
However, it pays to remember that making the wrong business assumption can end up costing you dearly.
That being said, only an independent analysis and review from an expert can paint a clear picture of your true financial standing so you should consider it a worthwhile investment.
- It helps you stay relevant and updated.
There is no denying the business world can be highly dynamic, not to mention volatile.
Fortunately, routine business valuations keeps you updated with the changes especially since the industry, economy, and your company will be evolving on a continuous basis.
- It will give you the luxury to be able to make quicker decisions in terms of selling, buying, and mergers.
When considering buying, selling, or securing much needed business funding, a business valuation can help you easily decide and grab opportunities that are truly lucrative.
- You are better able to comprehend your company’s place in the overall business landscape.
Business valuations will also give you a clear idea of the present competitive landscape of the industry you are involved in.
That means you will get relevant information like market price of publicly traded companies that are also involved in the same line of business as you are.
This kind of approach will not only take into account the money the business is likely to generate; it will also factor in the likely risks.
In other words, although you have projected revenues or profits, there is also that risk of getting only a portion (or none at all) of the revenue projected.
This type of approach takes into consideration not just the asset but also the liabilities.
This is done to help ensure a clear picture of the venture’s value is painted.
Sounds pretty straightforward doesn’t it?
If truth be told, the asset approach can be a bit tricky.
This difficulty can be attributed to the details—assets and liabilities to be included, identifying the value of each, and picking a standard to use to help determine value, among other things.
As the name indicates, market approach will rely on market signs to help determine the value of the business.
In other words, you would need to consider the worth of businesses that are similar to yours.
Obviously, if you are considering buying a business, you would want to know first the “going rate” of that business type before signing on the dotted line.