Are you looking to evaluate your business? Then, here are seven things you must know about business valuation.
- Business Valuation
In simple words, business valuation refers to determining the value of a particular business. It is done by certified valuers of the equity of the business owner. A common reason for business valuation includes knowing its value to sell it.
- The Need for Business Valuation
The need for business valuation falls under various categories. Some include,
- Financial Reporting: Derivatives, purchase price allocations, portfolio valuations, etc.
- Tax Reporting: Charitable donations, gift, estate tax, etc.
- Transactions: Buy-sell agreements, ESOPs, exit planning, etc.
In addition, business valuation also helps in matters concerning shareholder disputes, marital dissolutions, financial damages, etc.
- Various Business Valuation Methods
Some of the most widely used business valuation methods include the following.
- Capitalization of Earnings Valuation
- Asset-Based Valuation
- Market Value Valuation
- Book Value Valuation
- Multiples of Earnings Valuation
- Discounted Cash Flow Valuation
- ROI-Based Valuation
- Date of Business Valuation
In business valuation, the date certainly matters. It is because business valuation helps compute a business’s value at a particular point in time. But its value can change over time due to various external and internal factors. Hence, you cannot refer to October 2020’s value in October 2022. You will have to re-evaluate the business to know its current value.
- Information Required for Business Valuation
Documents required to conduct business valuation include the following.
- Last five years’ financial statements
- Interim financial statements and projections
- Information that describes the company’s services/ products, customers, operations, competitors, and vendors
- Business planning information like reports can also help
- Other Uses of Business Valuation
Companies can use business valuation for other purposes, like getting information about risk measurement and conducting competitive financial performance reviews. It can also help business owners identify key value drivers and use them as long-term business planning tools to enhance their overall performance.
- Multiple Values of a Business
A business can have multiple values at the same time. It is because the value is determined by assuming a buyer is prepared to pay for it.
Business valuation is essential as it helps you know its worth at that point in time. However, you must avoid valuing your business on your own. As business valuation employs specialized techniques, you must hire certified valuers. We hope these business valuation insights served the purpose.