Tuesday, 20 March 2018

Reasons a Business Owner May Need a Business Valuation


In this fast changing economic climate, knowing how much an asset is worth and how that value is determined is a pre requisite for intelligent decision makingi.e. for choosing investments for a portfolio, in order to decide the appropriate price to pay or receive in a takeover, for litigation purposes etc. It is imperative for every business that it has an up-to-date business valuation on hand at all times.Business value keeps on fluctuating so even if you have your business valued only a year ago, the value probably won’t be the same today. Therefore, it is imperative to keep a close tack of business value.

Business Valuation is the method of determining the value or worth of a business. It helps the business owners in making a road map about how to adjust their short-term and long-term goals so as to create a practical timeline for the potential sale of business and for other exit strategies. Valuation of business is the method of determining the worth of a business by generally using three valuation approaches Asset Approach, Market Approach and IncomeApproach.Business valuation may also include analysis of company’s capital structure, management, its’ future earningsetc. Business can be valued using the following steps-Planning and Preparation, Adjusting the financial statements, Choosing the business valuation method, Applying the selected valuation method and Reaching the business value conclusion.Also Read:Book Value Vs Market Value

Following are the reasons for a business owner to need a business valuation:-

1)      An opportunity to sell -If you are planning to sell your business, knowing how much your business is worth becomes a necessity. The process of valuation should be started far before the business goes for sale on the open market as it will give an opportunity to increase the company’s value to achieve a higher selling price.

2)      Knowing business value during mergers/acquisitions- It is of great significance for a business owner to know the value of their business when planning for merger or acquisition. If a major company is in a deal to purchase your company, you should be able to communicate them the value of business as a whole i.e. the enterprise value or theoretical takeover price. For this purpose, there is a need for business appraisal (valuation) so as to get the correct price of your business.

3)      Litigation:-In any kind of court case whether it is divorce or injury case, business owner wants to prove the value of his business in court so that damages can be based on its true value rather than on an inflated figure from lawyer’s estimate.

4)      Tracking your goals:-Every business has short-term and long-term goals. In order to achieve these goals, it is very crucial to measure the progress of business. Business valuation helps to measure your progress towards achieving your goals and therefore provides a roadmap on how to achieve these goals.

5)      Knowing the true value of your business: - Business value can be assessed by knowing the stock market value, total asset value and company bank account balance. However, this does not provide the true picture of a company. Business valuation helps to show company’s income and valuation growth over the course of 5 years which helps the potential investors to build confidence as investors like a company that has regular and consistent growth as it ages.

6)      Better Knowledge of company’s asset:-It is important to have an accurate business valuation assessment .Business Valuation provides specific numbers which enables business owners to obtain proper insurance coverage.

7)      Retirement Planning:-Business owners take a lot of risk by investing a lot of their net worth-in one asset i.e. their business. These same business owners expect to fund their retirement with the proceeds from the sale of their business. It is indispensable for business owners to know the value of their business so that they may know that at the time of their retirement their goals are met. Therefore, sooner you determine the value of your business, the better it is.

8)      Strengthen your credibility:-Valuation helps to build confidence from employees to lenders to future buyers. If business wants to expand or attract investors, business valuation will help lenders and investor to evaluate business.

9)      Estate planning and taxes:-Business Valuation plays an important role in Estate planning and taxes. It helps business owners to plan for the inevitable taxes that are to come so that you can ensure your legacy lives on.

Conclusion

Business Valuation is imperative for every business as it tells about the true worth of a business. Moreover, it helps business owners to know the fair market value of a business so that business is sold at a reasonable enterprise value or theoretical takeover price. From the investor’s perspective, business valuation helps investors to build confidence in company by looking at company’s regular income and consistent growth over the course of 5 years. Therefore, Business valuation is the key for a business to achieve its short term and long term objectives.

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