A business valuation is needed to determine the exact value of a business or an asset. Valuation analysts always take into account the quality of company management, as well as potential income, the market value of assets, and capital structure. In this article, we will explain in more detail the concept of corporate valuation and how this process takes place.
Reasons to do a business valuation
Business valuation not only carries financial benefits, but it also helps a company become a better company. Below we describe the main reasons for conducting a business valuation:
- Litigation- If you ever have to deal with litigation, business valuations will help you provide evidence about the value of your company. That way, in the event of damages, the court will base compensation on the actual value of your business
- Exit strategy planning – if you have already developed a strategy to sell your business, it will be very useful for establishing the underlying cost of a company, then develop a plan to increase the organization’s income so that you can then increase its value as an exit strategy
- Buying the business – usually, sellers and buyers have different opinions about the value of the business if the company provides a certificate of real value – buyers are willing to pay it
- Selling a business – it makes sense to want to sell your business for the price it deserves, and a business valuation can help you do that
- Strategic planning -it’s impossible to see the true value of assets from depreciation schedules, plus it can be risky, and a business valuation can help you make more informed decisions
What is a USPAP? What are business valuation standards?
Real professionals and business appraisers follow special unified professional appraisal standards which are the official norm of business appraisal standards in the USA. By following these standards, the analyst shows their dedication and reliability, while those who flout the USPAP rules face harsh criticism, their work is questioned and their assessments are hard to be considered in court proceedings.
How do appraisers determine value?
So, the next question we’ll break down in our corporate valuation a guide for managers and investors is the main approaches analysts take to valuing your business, there are three main ones in total:
- Income approach – With this method, professionals take into account the potential profit of the company if you invest in it. This method can also take into account changes in the amount of profit, working capital needs, and future costs
- Market approach -this method involves evaluating a business based on transactions that have taken place
- Asset Approach – analysts measure the real value of a company’s assets minus its liabilities. This method is most often applied to low-performing organizations
Can a business has more than one value?
The answer to this question is definitely yes. A company may have multiple values at one time because its price is determined by the amount the buyer is willing to pay for it. Therefore, an organization may have several potential values for different types of buyers.
Is the valuation date important? Do business valuations expire?
Business valuations occur at some point in a company’s life, there can be no such thing as a company being in the same state all the time, so its value may vary depending on a variety of internal factors. Business valuation has no expiration date, but the aspect of derivative value may no longer be relevant the older the report becomes.