Why you should do Annual Business Valuations

12-September-2019 by Virtue Ventures

Every business owner considers having a business valuation done once he decides to sell the business, but you should have an up-to-date business valuation on hand at all times. Ideally, you will have one done at least once a year to protect against various possibilities.

Why Valuation Matters?

Before we tend to get into why valuation matters, we need to understand what valuation is and why a company needs to be valued. Valuation determines the value of a business, asset, or company. Although the goal is to determine the fair market value, there’s no one way to be certain of the ultimate price paid. Typically, it depends on several factors including industry, sector, valuation methodology, and also economic conditions. You can also count on a fact; you can have your business valued by two professionals and you will come up with two different answers.

A company needs to be valued if it’s being bought, sold, or liquidated. generally, a company must provide a value of its assets or company as a whole to raise debt also. A valuation professional typically employs financial statements, cash flow models, and market research. In different words, they are going to look at the discounted cash flow (DCF), market valuation multiples, and comparable transactions. A strategic buyer will also value your company. They will use some of the methods already mentioned, but they will also Consider your management team.

How to Deal with Valuation

When dealing with the valuation process, it is necessary to get as several facts as possible with 1-2 clear goals. Why are you valuing? What are you trying to accomplish with this valuation? You need to assess what the aim of this valuation is. It might be shareholder disputes, estate planning or gifting of interests, divorce, mergers, acquisitions, sales, buy-sell agreements, financing, and purchase price allocation.

> Valuation for Mergers, Acquisitions & Sales:

Interested parties throughout a merger, acquisition, or sale need to obtain the best fair market price of the business entity. They have to seem at their return on their investment. (your company is their capital being deployed). this can ultimately be negotiated between the client and the marketer.

 

>  Valuation for Estate & Gifting:

Death could be a fact that everyone is going to face. however, the timing of that event varies for different people. If your business is a part of your estate, you need to conduct a valuation of your business. This could be done either before estate planning, gifting of interests, or after the death of the owner.

 

> Valuation for Disputes (Shareholder or Divorce):

When some divorces, they have to divide the assets and business interests from each other.

Occasionally, a breakup of the company is within the shareholder’s best interests. This might also occur once shareholders are withdrawing and need to transfer their shares.

 

>  Valuation for Financing:

Banks hate risk. As a result, they have to validate their investment in your company before they provide capital. At this point, they request a business appraisal of your assets.

 

Pricing Your Deal Right

There is no one way to value a business and there are multiple valuation approaches, together with Income, Assets, and Market. The valuation will be a very complex process. It can also bring up issues that weren’t previously addressed – like an owner’s differing interest from the other shareholders.

3 primary business valuation theories fall into the following groups:

  • Income-Based ApproachThis applies to a going concern
  • Asset-Based ApproachThe asset theory considers a liquidation approach
  • Market-Based ApproachConsiders the value to be related to other companies, (or real estate) in a similar line of business

Reasons a Business Owner should have a Business Valuation

There are several reasons why a business owner or individual should know the worth of a business. The fair market value standard consists of an independent buyer and seller having the requisite knowledge, not under any undue influence and having access to all of the information to make an informed decision.  

Below are common reasons that a business owner or individual should have a Business Valuation:

  • To set a basis of Value for a business when valuation has not been previously performed.
  • To perceive the worth (value) of the business.
  • To set a baseline value for the business and develop a strategy to boost the profitability of the business and increase the value of the business for an exit strategy.
  • To evaluate an offer and negotiate the strategic sale of a business.
  • For exit strategy planning purposes.
  • To determine weaknesses in business to refocus the operational efforts to boost profitability and the bottom line.
  • For Investor or partnership disputes.
  • For shareholder or partnership investments or buyouts.
  • For buy-sell purposes and funding the agreement.
  • To obtain bank financing or alternative investment.
  • To value a business for business bankruptcy.
  • To determine the intrinsic value of a business and assess whether it is different from the fair market value of the business.
This list is not complete. There are many other reasons that a business valuation is also required.