Importance Of Business Valuation

A common myth among many businesses is that they ought to know their company’s valuation only when they are looking to sell it. And this is where the businesses end up getting less than what they desire in terms of results. Many a time, business owners are too late in realizing the importance of valuing their business. This is quite common among small and medium-sized businesses. This leads to a procrastination in hiring a professional to complete the process of completing a valuation. The delay in starting the business evaluation will have little to no chance to increase the value of your company before a defining moment. The defining moment could be the seeking of investment or it can be the addition of a new owner to even selling your company.

A business valuation not only gives you the idea of how your company is doing in present times but also provides an insight as to where you are headed. This way, the business can get to know which areas need to be improved in order to increase value. This an  is an extremely valuable part of business valuation, and also the most forgotten. Since many business owners conduct a business valuation in the nick of time, these important verticals of valuations are mostly hasty and also leave very little to no room to actually improve the results. As an reiteration, valuation shows areas which need to be improved, and can thus serve as the foundation for strategic decisions aiming to develop and improve business.

Getting down to business

Traditionally, the valuations are done for the sale and purchase of a company. But there are also many other scenarios where a valuation is needed. For instance, while listing company on a stock exchange valuation is utmost important to set a price that the market believes is fair and thus accepts. Valuation also determines the amount of future payments if one need to report estate tax or gift tax.

A good price and a great price

It is only through the right kind of valuation that the good or a great price can be determined. Having a fair valuation can set the pace for negotiation. If you give enough time to the valuers then they can ascertain all the ins and outs which would eventually give a price tag of satisfactory level.

The approach of the valuer for a fair value is of immense importance. As we know that the fair value measurement is of paramount importance in today’s financial reporting. The key points which get accounted for are business combinations, intangible assets, employee share options, financial instruments, etc. Hence, a due amount of importance must be given to the transactions undertaken by company in financial reporting so its impact can be gauged on capital markets. For the same reason, there could be a situation where valuations will need to be carried out and included as part of the financial statements.

Traditionally business valuation are done by methods such as :

Asset Valuation

A company’s assets include tangible and intangible items. Therefore, the book or market value of those assets are determined for business’s worth. All assets in the form of cash, equipment, inventory, real estate, stocks, options, patents, trademarks, and customer relationships are collectively counted for valuation.

Historical Earnings Valuation

The criteria of historical valuation is set by undergoing the history of the company with regard to the business’ gross income, ability to repay debt, and capitalization of cash flow or earnings which determines its current value. If business is not even able to pay for the basic expenses of operation, the value drops drastically. Conversely, a good history in repaying debt quickly and maintaining a positive cash flow adds positive value to the business.

Discount Cash Flow Valuation

When the profits are not expected to remain stable in the future, the method of discount cash flow valuation is used by the valuers. It calls for the business’s future net cash flows and discounts them to present day values. With those figures, there is information at hand about the discounted cash flow valuation of you can also have a projection as to how much money your business assets are expected to make in the future.

Future Maintainable Earnings Valuation

The commercial viability of business in the future is a factor to consider for its value today, and one can use the future maintainable earnings valuation method for business valuation when profits are expected to remain stable. Business’s future maintainable earnings valuation, and to do so it is imperative to  evaluate its sales, expenses, profits, and gross profits from the past three years. These figures helps in future prediction of the business valuation and can also determine how well or bad the business is doing in present period.

This content is meant for information only and should not be considered as an advice or legal  opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.

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