Business Valuation Guide: Why Businesses Need Valuation Services
Many business owners keep asking me why they would ever need business valuation services. I’ll tell you what I tell them every single time. Business valuation offers essential financial details that are vital to making better financial decisions for your company. Valuation specialists use strategic methods focused on the economic aspects to carefully research the consistency and quantity of your assets to determine the genuine net worth of your company in the market.
Most potential investors also prefer to examine valuation for mergers and acquisitions of start-ups and small and medium-sized enterprises. I’ve also seen companies that are interested in diluting or selling their assets to arrange the required capital expenditure use business asset valuation as a method to entice prospective partners or buyers.
I’ve listed some of the most commonly used valuation services here:
- Audit Support
Business valuation experts encourage the auditing of various evaluation models, effective platforms pricing, and fair value assessments of your business.
- Due Diligence Support
Professional business valuation services meet the criteria for all kinds of due diligence services like data acquisition, data room management, inquiry, and coordination between all concerned parties.
- Portfolio Valuations
According to corporate guidelines, these valuation services offer comprehensive portfolio evaluation, including complicated fixed-income assets, capital variants, and investment funds.
- Start-Up Valuations
It allows investors to choose between budding businesses and helps start-ups assess their market equity and assets during fundraising endeavours.
- Transaction Advisory
It provides model testing, discounted cash flow, leveraged buyout design, valuation for mergers and acquisitions, ideal debt calculation and equity models, pitch paper development, memorandums of understanding, etc.
The Need For Business Valuation Services
- To liquidate assets or sell part of the business
- To measure your equity interest in the business
- For negotiation mediation and capital gains
- For assisting investors in evaluating companies
- For joint venture alliances in bankruptcies, mergers, and acquisitions
Business valuation can also be used for:
- Buy/Sell Agreements
- Estate & Gift Tax
- Employee Stock Ownership Plan
- Insurance Valuation
- Loan Financing
- Purchase Price Allocation (for tax & financial reporting)
- Marital Dissolution (in case of divorce)
- Succession Planning
- Shareholder & Partnership Buyouts or Disputes
The Benefits of using Business Valuation Services
Suppose your company is seeking investors to raise funds for business growth or saving it from bankruptcy. Any person or entity interested in contributing to your cash flow will undoubtedly want to go through a comprehensive business asset valuation report. So I recommend adding a detailed valuation projection based on a funding amount that you expect from the investor.
Since investors love nothing more than knowing exactly where their money is going and how it will grow to provide them with exceptional returns on their investment shortly, the predicted projection will help garner their attention. Also, you’re much more likely to gain their favour when they are satisfied that their funds will be utilized to carry your business to the next level, enhance your market value, and put more capital back into their pockets. I’ve also mentioned some other benefits of using business valuation below:
- Provides a better understanding of your business assets
A detailed business asset valuation is essential because the rough estimates you usually receive from your accountants are generalized and not precise. Having an accurate idea about your company assets and their market value will help you make better financial decisions for the benefit of your business and its clients.
Another significantly critical assessment that business owners are advised to obtain is insurance valuation. The accurate figures estimated by the valuation process will help you arrange ideal insurance coverage for your assets and protect your business against numerous damages down the lane.
- It helps determine the actual market value of your business
Most people have a general idea of what their business is worth in the market. Their understanding is based on primary data like the stock market trends, cumulative asset value, and available capital funds. However, professional valuation services use much more than just these fundamental aspects to arrive at the genuine value of your enterprise in the market.
Knowing the actual market value of your business will help you ensure the preservation of funds, progressive growth trend, and future development prospects. During hard times, it can also be a deciding factor for deciding whether selling your business is a good possibility or not. Since business valuation considers the growth in income and assets over the years, it can also entice potential buyers with your regular and consistent growth trends.
- Calculates a genuine resale value of your business
Having an adequately calculated resale value of your business in mind becomes necessary if you want to sell your company without incurring any significant losses. However, the process of business asset valuation in such cases must be initiated well in advance of your liquidation. The longer you have before your business goes up for sale in the open market officially, the more opportunity you’ll have to enhance your business value and obtain a dramatically higher selling price for your business.
As a business owner, staying aware of your business’s genuine resale value will help you negotiate better terms and benefits during the initial offering. You can also use the black and white financial statistics generated by the business valuation services to fortify your stance on the higher selling pings.
Still, this approach only works if you start the business valuation process way before your company hits the market shelves, as the extra time will help you get a head start on fixing the value depreciating aspects of your business. Keeping in mind that owners have asked me to evaluate businesses years before their actual sale, I can say with absolute certainty that it helps generate humongous profits for the selling party.
- Offers access to more high-profile investors
I’ve often observed how prospective investors ask owners to provide a recent business asset valuation report with detailed estimates and future projections based on their assets and finances. I’ve also noticed that potential buyers are more attentive to businesses that offer comprehensive reports showcasing how the funds raised will be used to grow the business, enhance its market value, and generate more returns on their investment.
It is a well-known fact that most investors believe in the mantra of making smart investment choices and prefer solid data that highlights where their capital funds will be directed to and how efficiently it will generate profitable returns. So if you are looking to raise additional funds for growing your assets or saving your business from an impending financial disaster, you should most definitely think about hiring professional business valuation services and request them to include future projections based on the required funding and your ongoing business trend.
- Investors rely on your valuation for mergers and acquisitions
A majority of the giant corporations are in the habit of acquiring or merging with businesses that show many future potentials while using the least possible capital funds they can use to increase profitability. So, suppose a significant company is interested in purchasing your business. In that case, you should show the investors what your business is worth as a whole, how much assets you are withholding, how you have grown over the years, and how it will keep growing in the future. If you know how much your business’s market value is, you’ll be able to negotiate your way into higher investments using the numbers provided by expert business valuation services.
Professional valuation for mergers and acquisitions will enable you to turn down bad deals or enter into negotiation mediation with the investors if you’re being offered much less for your business than it is worth. Knowing the genuine market value will also encourage both parties to come to a mutually beneficial agreement. A periodic business valuation will allow you to set new business goals and enhance your business’s value over the upcoming years. Every year, you should also reserve some time to compare and assess your previous year’s valuations, growth, profits, and losses and determine aspects that need improvement.
Knowing what every asset of your business is worth is invaluable information to have for any business owner. Additionally, the business valuation of a start-up or a budding enterprise can help you determine their actual financial worth.
The following tools can be used to conduct a business asset valuation:
- Fixed Asset Analysis
- Income Multiplier
- Liquidation Value
- Market Capitalization
- Reverse Discounted Cash Flow
Business valuation services also help business owners with tax law compliance, mergers and acquisition, asset purchase, revenue generation, fundraising, donations and charity, litigation, divestment, capital gains, buyouts, shareholder modifications, etc.