Business Valuation: What is it And Why Does Your Business Need One?
A business valuation is a process that determines the true value of your business. The more money you have tied up in your business, the more it’s worth to make sure you get an accurate appraisal of what your company’s worth so you can make good decisions on how to run it. If you’re considering selling your company or buying another one, you’ll need to know what they’re really worth so you can negotiate properly.
When to use a business valuation
Business valuation is a professional assessment of a company’s net worth as determined by an independent third party. Generally, the value of the assets less the liabilities will result in an estimate of what a buyer might offer for purchase. This helps provide an objective appraisal for selling or purchasing a company. Business valuations are helpful in various ways. They can be used to figure out how much to charge customers or how much money should be raised from investors. A valuation report can also provide insight into tax obligations, retirement plans, succession planning or even deciding whether or not to dissolve the business.
Why you should get one
A business valuation will ensure that you are not under or over-valuing your company. Think of it like an appraisal of your building, its fixtures, landscaping, etc. This assessment will tell you the market value of what you have to offer. In short, getting a professional assessment of your assets (physical assets and intellectual property) will enable you to make a reasonable estimate as to how much money (profit) you will generate for shareholders over the course of the next year or two. The business valuation process can be a bit daunting for someone who has never gone through this process before but with proper guidance from professionals in the field there’s no reason not to try.
How to get a business valuation
A professional business valuation can cost upwards of $5,000. But there are plenty of online calculators that do the job for free! By entering a few basic data points about your company into an online calculator, you’ll be able to get a rough estimate of its worth. Even if the numbers aren’t exact, they will help you determine whether or not you’re heading in the right direction. If a calculation shows that you’re undervalued, take time to make a list of concrete ways to increase your value. And if the numbers show that you are overvalued, then congratulations! You just saved yourself money on this step!
Who can perform a business valuation
A business valuation will help you prove the worth of your company to banks or investors, which can be really helpful when financing a new project. A valuation will also provide a good estimate of what the current value of a company is, in the event that you are looking to sell it.
Asking for referrals from friends who have sold their own businesses can be a good place to start they’ll have knowledge about how much those kinds of deals usually go for.
You may also be able to speak with other small-business owners in your area who have gone through this process before there may be some that are more open than others about sharing information about what their sale process was like.
5 Things That Can Affect Your Company’s Value
1. The Strength of the Economy — The health of the national economy can be viewed as an indicator for your company’s performance. If the economy struggles, people might not be spending as much money which affects revenue for you and other companies in the area. A healthy economy will increase company valuation.
2. The Number of Employees — Having more employees has a large effect on how much money you make in comparison to an owner/operator business. You’ll want to keep this in mind when determining the value of your company. 3. Growth Potential — It’s important to consider whether or not there are opportunities for growth that could help create future cash flow.
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4. Market Conditions — When considering a potential buyer, they’re going to take into account what other businesses are doing in their sector and if they have enough room to grow themselves while competing with you (and others).
5. Business Type — Your type of business may have some additional variables that come into play when valuing your company including marketing strategies, advertising budget, customer service budget, etcetera. These items should be considered when determining what someone would pay for your business because they all factor into profitability.
