Evaluating your business is a very good practice that can become useful to you in any case, whether you want to sell it, find investors, or make a merger and acquisition deal. There are a lot of nuances to consider in order to do a fair valuation, and of course, you’ll need expert intervention for such a process. But in order for you to better understand this topic, in this article, we will highlight the concept and the main methods of business valuation.
Definition of Business Valuation
In simple terms, business valuation is an accurate calculation of the economic value of an organization. There are a variety of business valuation methods, but what they all have in common is that they all use an objective assessment of every detail of your business. Generally, some valuation methods are used much more frequently than others, and the most common one is considered to be a count of your tangible and intangible possessions, including equipment, inventory, liquid assets, and so on. Your profit potential, stock value, and management structure are also often used for valuation.
Why do you need a business valuation?
Every company will benefit from a business appraisal, and for especially large organizations, it is even mandatory. So why, in principle, do a business valuation? Below we have highlighted the main reasons:
- In the complete withdrawal from the market and sale of the business
- At mergers and acquisitions
- For raising investment and funding
- For shareholder appreciation
- For tax reasons
- For determining a partner’s ownership interest
To some extent, the reason for doing a business valuation also determines how to evaluate a company worth. Also, the choice of method is affected by the size of your company, your business and the area in which you operate, and other factors.
Main methods of business valuation
Below we will make an analysis of the main company valuation tools, how this or that method works and when it is most applicable:
- Market Value Valuation
Contrary to the main requirements to be objective in their valuation, this method may be the most subjective of all. The method works by comparing your company to similar cases that have already been sold. Also, this method of evaluation can only be feasible if you have enough information about your competitors. Because of this, this valuation is also considered the most difficult, especially for sole proprietors. In addition, as already mentioned, this method is subjective and therefore inaccurate and the final value of your company will be decided solely in negotiations with the interested party. You can make an effort to convince potential partners of your value, but it is still ineffective.
- Asset-Based Valuation
From the name, it is clear that this appraisal tool involves calculating the net worth of your assets and subtracting the value of your total liabilities according to the balance sheet. This method is divided into a going concern, which is when a company does not plan to completely sell its assets and subtracts the value of the assets minus the liabilities, and a liquidation value. With this method, it is assumed that the business has completely stopped its operations, and the evaluation will be based on net cash, with its value being much lower.
- Evaluation based on the return on investment
This method evaluates your company’s profits, and its potential return on investment, that is, how much benefit an investor can get when buying this company. This method is great for you if you are looking for a potential investor. But in this case, you’ll need to gather and provide a lot more information, because invest-ors will want to know what their returns will look like and how real these numbers are.