Why to value the business?

Valuing business is a great way to examine the financial health and moneymaking potential of the business. There are plenty of other benefits that come part and parcel with valuing the business:

  • 1. A valuation also offers the opportunity to consider and manage the company’s risk profile. Valuation is not about determining what a company is worth in the hands, but instead its transferable value.

  • 2. Valuations can be performed on assets or on liabilities. They are required for a number of reasons including merger and acquisition transactions, capital budgeting, investment analysis, litigation and financial reporting.

  • 3. The true value of an assets may not be shown with a depreciated schedule and if there has been no adjustment of the balance sheet for various possible changes, it may be risky. By having proper valuation of business that will help make better business decisions.

  • 4. The valuation is usually needed when required to negotiate with banks or any other potential investors for funding. Professional documents of the company’s worth are usually required since it enhances credibility to the lenders.

  • 5. Valuation can give a clearer overview of the financial health of the business, which can help to pinpoint underperforming areas and focus on the approaches that are working well.

  • 6. Business owners can know the worth of their shares and be ready when to sell the business and to ensure no money is left on the table and get good value form the business.

  • 7. If there is a plan to sell a business, it is wise to come up with a base value for the company and then come up with a strategy to enhance the company’s profitability so as to increase its value as an exit strategy. Your business exit strategy needs to start early enough before the exit, addressing both involuntary and voluntary transfers. 

More risk in the business, lower the multiple can be expect to be achieve. To work out the unique multiple, you need to accept that there is some guesswork and subjectivity involved. Unfortunately, there is no set way of finding a designated multiple. Instead, there are a few basic rules of thumb to follow:

  1. Research your industry. What multiples have other businesses like yours sold for?
  2. How healthy is your business’s financial history?
  3. Is it stable enough to request a higher multiple?
  4. What situation will the business be left in once you depart (if you are selling)?
  5. Do you have any contracted income guaranteed over the coming years?
  6. How expansive is your customer base, and how strong are your supplier relationships?

Valuing your business isn’t just about offering a snapshot of the profit and loss of your business, it can give a detailed overview of your company’s chances of sustainability over a prolonged period of time, so it’s definitely something that you should consider.

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