The Importance of Valuing Your Business
February 27, 2017 by Easy Buy Sell Business in Blog

The Importance of Valuing Your Business

The Importance of Valuing Your Business

A business valuation is usually done when a company is either going to put its business on the market, or it is considering putting its business on the market for sale. Why do valuations need to be done before a business goes on sale?

Because it is important for companies to ascertain the value of their business, to determine how much it is worth. If you were to sell something, you would need to know what the item is worth before putting a price on it, right? It’s the same concept applied here. You need to know the importance of valuing your business.

The valuation process of a business is done to help companies eliminate guesswork. This simply means the process is there in place to help companies avoid the classic mistake of either pricing their company too high or too low, resulting in a sales impasse between the buyer and the seller.

Valuations are used by the financial market participants to determine the price that they are willing to pay or receive to affect a sale of a business.

 

Factors That Determine A Company’s Value

There are seven factors that will determine the value of a company:

  1. What the company’s sales figures is like
  2. What the company’s earnings are
  3. How the company is performing
  4. What the market outlook is
  5. The company personnel headcount
  6. The net book value and fair market value of the equivalent operating assets
  7. The company’s intangible assets such as the company’s image, reputation and goodwill

 

How to Value a Business

There are three methods of valuing a company’s business:

  • The Market Approach – In this approach the value of the company is set based on the values of the other businesses that have been sold. Companies would need to research the sale prices of similar businesses which are located around the geographic area for comparison purposes.
     
  • The Balance Sheet Valuation Method – This method includes the adjusted book value and the liquidation value of the business. The total of these values must be offset against the sum of liabilities incurred. The figures from the company’s financial records will be taken into consideration, and keep in mind that it can be hard for a business to sell If it has assets that have depreciated too much to gain prior tax advantages.
     
  • The Income Method – In this method, the company’s earnings level is taken into consideration using a capitalisation rate, multiplier and discount rate. Although several methods can be used, each of these methods must have a level of earnings and conversion factors so these earnings can be translated into the company’s value.

 
As a business owner looking to sell your company, you need to avoid the classic mistake of using a one-size-fits-all approach just because you are trying to get your company valuated as quickly as possible. Rushing into things is never a good idea and the mistakes likely to be made along the way may cost you more than you think.

Business owners should also try to avoid the mistake of valuing the business for far more than it is worth. Get the valuation done professionally right from the beginning and save your business the time and money right from the get go.