The Importance of Business Valuation
A business valuation quite simply is to follow the
correct process, as well as procedures for determining the worth of your
business. It might sound very easy, though to do it right can take a lot of
knowledge, time, thought and preparations.
There can be a variety of reasons why you need a
business valuation that is up-to-date. You might have to sell your business for
certain reasons like family problems, divorce, health, or retirement. It’s
possible that you need equity or debt financing due to problems with cash flow
or for expansion, and potential investors or financiers may want an evaluation
of your business’ worth. If you decide to add shareholders or when an existing
shareholder wants to buy out, it’s necessary to determine shared values.
It doesn’t matter what your reason is, the worth of
your business will depend on different factors, from the economy’s current
state all the way through to the balance sheet of your business. For instance,
if any business recently has been sold similar to yours and in the same area,
your business’ value may be largely determined by what price these previous
businesses were sold for.
Make sure it will be done right
A business valuation
shouldn’t be done by the owners if it needs to be done correctly because they
are too close to the business to be objective when answering questions.
Therefore, it’s recommended if you want to be sure you get the highest price on
the sale of your business, you should hire a professional evaluator with the
needed experience to perform your business valuation.
Professional evaluators or accountants use different
methods for determining a price that is fair for a business.
These methods can include the following:
Asset-based method
With this method, it basically means that all your
business investments will be totaled up. Usually, it’s done either on the basis
of liquidation or an ongoing concern.
The approach that is relevant with liquidation
asset-based, means that receivable net cash must be determined after all the
assets are sold and all liabilities are paid in full.
With an approach for a going concern asset-based, a
list of your business’s net worth balance sheet will be done to determine the
value of assets after liabilities were subtracted.
Using this approach when evaluating sole
proprietorship can be very difficult. With corporations, the company owns all
of the assets and commonly it will be included in the sale. However, assets of
sole proprietorship belong to the owner, which makes it difficult to separate
personal and business use.
Earning value methods
This approach can be used to predict the true value of
a business’s ability in producing future wealth. Most frequently, this method
is used to capitalize earnings of the past.
The evaluator must determine the expected cash flow
level of a business by using its past records of earnings and normalize it for
unusual expenses or revenue. This can then be multiplied with the normalized
expected cash flow through the factor of capitalization.
A capitalization factor can reflect on what return rate might be reasonable for a purchaser to expect on his/her investment, as well as measuring risks on what expected earnings can’t be achieved.
Approaches to market value
A business
valuation approach for market value can be done in establishing your
company’s value through comparing it with businesses similar to yours that
recently has been sold. This will only work when there are enough businesses
similar to yours to compare.
Once again, it can be difficult to assign the value of
a sole proprietorship that is based on specific market values. The reason for
this is that with individually owned sole proprietorship businesses, it’s not
easy to find public information on similar companies to compare.
However, an earning value method generally is most
popular to evaluate a business, but some combined business valuation approaches
may be the fairest when setting a price for selling.
First of all, it’s important to contact a business valuator that is a professional and experienced in this field. He/she can recommend the approach or approaches that will be best in setting your price and sell your company successfully.
