A business valuation is the process of arriving at a determination of the value of your business. A business valuation reflects the actual underlying value of your company based on solid fundamentals. It bears no relationship to what your stock price is trading for. Knowing your underlying value is extremely important to all business owners as it can shape future business decisions and provide valuable insight when making business decisions. There are three main reasons why you should know the value of your business.
Planning for the Future
The first reason is to help you plan the future of your business. Knowing the value of your business is extremely important when planning the future of your business. An accurate valuation can show your business’ growth over time. Furthermore, it can show you where you are in relation to your competition. This is important as you plan for the future of your business. A valuation will help business owners learn how to continue to grow or decide whether it is time for a sale, merger or acquisition of your business. If your business is strained, a business evaluation is also important and may be necessary if your company has to file for bankruptcy. A business valuation can provide insight into the strengths and weaknesses of your business. This knowledge is imperative when planning for the future of your business.
Anticipating a Sale
An accurate valuation of your business is essential if you are thinking about selling your business. Business owners need to know the value of their business when negotiating a sale. This can help you negotiate for a higher selling price. Furthermore, if you are anticipating selling your business it is important to determine the value of your business sooner rather than later. The sooner you know the value of your business, the sooner you can start increasing your business’ value to sell your business at a higher price.
Anticipating a Merger or Acquisition
The third reason to know the value of your business is in anticipation of a merger or acquisition. Business valuation may be necessary in anticipation of a merger or acquisition. A company looking to purchase or merge with your company will want to know the value of your business. And so will you! Knowledge of your business’ value will help you when negotiating with another business and give you the power to make informed decisions for your business.
How to Determine the Value of Your Business
There are many different ways to value your business. The first step is to determine the method that is right for you. This article will briefly explain three common methods of business valuation (although there are many more.) The upcoming article series will go more in depth into these different methods.
When determining which business valuation method is best for your business, it is important to think about your business’s assets and who is looking to buy your company. If a competitor is looking to buy your business, the reproduction method may be a suitable option because it looks at how much it would cost to start a competing business and get that business to the same position as your business. Another popular business valuation method is the asset-based valuation method. This method considers your business’s total net asset value, minus the value of total liabilities. The asset-based approach is good if your business has assets that are already cash or can be converted into cash immediately. Finally, if your business has intangible assets like intellectual property, valuable employees, or a location known for your business, or brand name then an important thing to consider is the Goodwill valuation component. This should be factored in whenever your business has intangible assets that your competition. All of these methods and more will be discussed in our next article.