Importance of Business Valuation
How much is your business worth? Rather than pulling out an estimate out of thin air, a business valuation process is necessary to identify the amount that represents a business’ worth. This value can be used for a variety of purposes including selling a business or valuing shares.
Benefits of establishing a business valuation process is important to business decision-making. Do I need a credit, do I need more labor, will I expand, and is management successful? All important to growth. Here are few more to consider:
1. Provides a numerical and accurate value of the company
The tendency for a business owner is to undervalue or overvalue their own business. This is the reason why it is necessary to get a third party that will provide an objective perspective when valuing the business. An article on Entrepreneur magazine states that there are several ways to value a business ranging from valuing the business assets to projecting the annual sales. The methods can vary for a publicly-listed or a privately-held company.
As to which method can result in the most accurate results, this will depend on the type of business and the industry that you are in. An accounting firm with business valuation experience will be able to recommend and perform the most applicable method. The resulting value will be based on industry-accepted criteria and can be used as benchmark with other similar companies.
2. Gives owners a negotiating edge during merger and acquisitions
The biggest mergers and acquisitions of all time range in billions of US dollars. The settlement amount for these mergers depends on the business valuation at the time when the sale was discussed. In the event of selling a business, an owner can use the business valuation as leverage to negotiate the rate of sale.
The business valuation is also used to determine the success of a merger. The most successful mergers of all time include Disney buying Pixar for $7.4 billion and Google acquiring Android for $50 million. Both mergers have gone to be successful in terms of box-office releases and majority market share for mobile OS.
3. Supporting data for securing additional investment
Many business owners make the mistake of seeking for funding without crunching their numbers. Knowing the actual worth of your a shows investors that a business owner has clear goals for the company and has carefully considered the reasons for securing more funding.
When an owner includes the business worth in his pitch, investors can then use this figure gauge the projected profit from and to decide on the best form of investment in the business either through funding or buying shares. It can also help the investor to gauge the potential of the business including how much higher the value can grow.
4. Allows fair valuation during an ownership restructure
If a company restructure is required due to buyouts, leaving the partnership, transferring ownership, or retirement, a business valuation is useful to help assimilate the corresponding monetary value of his shares.
In a buyout, for example, both parties can benefit from a benchmark. The exiting partner can get a fair buyout package for his shares and the buying party knows exactly the value of shares that he bought.
5. Evaluate the performance and determine business strategies
Business valuation is an indicator of where the company sits in relation to its goals. Did the company attain the targets that they were trying to reach? With the timeline to achieving a business goal in mind, do you need to re-evaluate your business strategy in order to continue to attain the desired business value in the future. Without a true business valuation process in place you may be guessing and aimlessly pursuing unattainable goals.
For example, if a company has a goal worth $4 million dollars and the current business valuation shows that they are at $1.5 million, the owner, with an accurate business valuation can make an educated decision which way to drive the company towards their target and to come up with corresponding strategies for growth.
Once your business valuation has been done, set the new goals for next year to increase company’s value. For every year you should follow these steps to keep knowing your business valuation.