Business Valuation Write for us: Businesses require knowing their market value to assess their current financial health and future exit strategies. If you work in finance, you can benefit from learning how companies determine their market value. In this article, we discuss a business valuation, learn why it is essential, examine various methods available to value a business, and review some tips to value a trade effectively.
Why Is This Valuation Important?
Valuing a business is essential for the following reasons:
Knowledge of company assets: Performing periodic valuations allows companies to estimate the value of their capital assets.
Mergers and acquisition: Large companies may want to acquire smaller businesses to expand their market share. When companies have an estimate of their value in the market, they can negotiate better during acquisitions.
Better investment opportunities: Companies may seek additional investment to expand their business operations and focus on research and development activities. Performing a valuation of their business allows companies to showcase their progress and provides revenue projections to attract potential investors.
Measurement of progress: When performed regularly, valuations are a good measure of a business’s progress. A company needs to include valuation as part of its strategic business plan.
Sets a benchmark: Limited information is available on the sale prices of various businesses. Valuing a company provides a benchmark price, a good reference for buyers and sellers.
What is a Business valuation?
A business valuation is a process of determining the economic value of a business, giving owners an objective estimate of the value of their company. Typically, a business valuation happens when an owner wants to sell all or a part of their business or merge with another company. Other reasons include if you need debt or equity to expand your business, need a more thorough tax analysis, or plan to add shareholders. In this last case, the value of the shares would also need to be determined.
When do I need a Business Valuation?
There are certain situations, such as a merger or buying an existing business, where it can be imperative to know the value of a business. Circumstances commonly requiring a valuation include:
When your stakeholders change, anyone with a stake or potential stake in a corporation, such as new shareholders or possible investors, will want to know the value of a business.
If you want to sell, if you’re looking to sell your business or merge with another, your potential buyers or partners will want to know your business’ value.
To price options for equity compensation. If you’re a young startup company and offer compensation packages that include equity and stock options, you’ll need your business valuation to price those options.
For financing. Bankers and creditors must know your business valuation for loans or refinancing. Potential investors will need a solid grasp of the intrinsic value of your company before they decide to back you. Some loans don’t need a business validation but will depend on other factors, such as sales revenue history.
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How To Calculate the Value of Your Business
As a business owner, you ask to calculate the fair market value of your business, known as your business’s valuation. The circumstances that warrant a small business valuation process include:
- Refinancing a loan
- Planning to bring on additional shareholders or partial owners
- Looking to sell your business
Personal legal proceedings can also require a valuation—a divorce, for instance, may require a thorough accounting of your business assets.
There are various ways to calculate business valuations. The approach you use will depend on factors like your industry, the reason for the valuation, and the health of your business. Small businesses, corporations, and venture-capital-funded startups may each tap different formulas.
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