The importance of a business valuation

Elizabeth Barry 9 August 2016


Not sure what your business is worth? More than just determining a value, a business valuation can reveal how best to grow and develop your business.

A business valuation takes into account every aspect of your business to determine its value. Businesses are run on a combination of debt and equity, and a business valuation gives you a clear understanding of the value you actually own.

A business valuation also highlights the strengths and weaknesses of a business, which is important for identifying, prioritising and resolving its problems.

What is taken into account during a business valuation?

The end goal of any business is to grow the business, extend its longevity and increase profit. Gut feel and instinct count for a great deal, but a proper valuation provides an accurate take on whether or not your business is growing, stagnating or declining.

The value of a business is determined in a number of ways:

  • Assets. The asset valuation calculates your business’s value by taking into account your assets and liabilities. This applies to your current assets rather than what the business might earn in the future. The business’s liabilities are then subtracted from the value of the assets.
  • Future income. This method is employed when you’re considering the return on investment when buying or selling a business. Calculating future earnings is a good way to compare your business with similar enterprises and/or different investment opportunities.
  • Earnings multiple. If you’re looking at buying a business, this method helps compare future earnings to what they are worth at current interest rates. The multiple you choose depends on the industry and whether the business is recent or established.
  • Comparable rates. Comparing your business to similar businesses is a good way to get a real idea of your business’s value. Independent comparisons are relatively simple, but it’s a good idea to get a professional opinion.

Why do I need a business valuation?

Having a clear idea of your business’s worth is important when planning for your personal and professional future. It also helps you to:

  • Gain the upper hand in business negotiations. Going into negotiations with an objective business valuation sets the tone for deliberating prices and terms. Whether you’re in negotiations to sell your business or acquire an additional one, you’re in a better position to get a fair deal.
  • Resolve disputes. If family members or shareholders are disputing the value of their share of the business, a business valuation gives all parties a clear understanding of what they own. In divorce proceedings where assets must be divided, a business valuation is an integral part of the process.
  • Identify problems. When a business hits a rough patch, a business valuation helps identify where it might be experiencing losses and weaknesses, and also which strategies might best resolve those issues. Business owners are then better able to improve and streamline operations, therein saving time and money.
  • Expand. Every business owner aims to expand with time. A business valuation helps with deciding how to pursue expansion goals, as well as identifying investment opportunities and which areas need attention.
  • Plan retirement. Many business owners invest their lives and their savings in growing their businesses. If you’re planning to retire with the sale of your business, getting a business valuation is a good way to determine its value before you sell it.

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