Dec 14 How, Why, And When To Get A Business Valuation
A business valuation is primarily done to determine the actual value of a business. It involves a rigorous auditing process where all aspects and attributes of a business are treated as its financial components and then used to compute its market worth. Business valuations are typically conducted by certified and well established Clifton NJ accounting companies who are adequately equipped with competent auditing departments capable of producing accurate statement of values for all kinds of businesses. Businesses commission valuations for many different reasons and we will look at some of the most common ones below. There are several business instances that necessitate a valuation and we will look at these ones too. But before we discuss all that, let us first look at the three main business valuation methods.
How It Is Done
The first business valuation approach is called the asset value or the cost-based method. In this instance, the business value is calculated from the market value of its assets. Considered the most objective approach, the real business value is the difference between the liquidation value of its current assets and all its liabilities. The other business valuation method is called the market value approach. Here we use current market data from the stock market, recent sale information of similar or related businesses, prevailing market conditions etc to compute a fair market value of the business. And finally we have the earnings/income value approach, which is split into two main methods — the capitalization and the discounting method. Both income-based valuation methods use the firm’s income or revenue generation trends to determine its value. It is the most subjective approach because the business accountant or auditor relies on financial projections to estimate value growth of the business over time.
Why It Is Done
As mentioned in the opening statement, business valuations are mainly done to determine the true market value of a company. Another important reason for conducting a business valuation is to provide better knowledge and information regarding all business assets. The asset-based valuation method gives you the current value and the liquidation value of all business assets and liabilities. Another reason for doing a business valuation is to know the current market value of similar or related firms. You can request for a market-based valuation to get a realistic estimate value of your competitors and so on.
When It Is Done
Some of the reasons for conducting business valuations have already been discussed in the section above. The main question that you should ask yourself here is when is it necessary to know the value of your business? There are several such instances and the main one is before a business merger and/or acquisition. There are several types of business mergers and acquisitions depending on the process of merging and the nature or type of the resulting business entity. Some of the most popular M&As are horizontal, vertical, conglomerate, concentric/congeneric, forward, and reverse mergers. Regardless of the type of M&A, you should always have a business valuation before you sell or merge your company with another one. All shareholder-related issues including disputes, buyouts, additions, divorce etc necessitate a business valuation.
Business valuations are necessary before huge business transitions like successions and also for estate planning, taxes, insurance etc. You can also get a valuation before raising capital from venture capitalists, ordinary investors, business loans etc. A business valuation is also crucial for strategic decision-making and planning, especially before major corporate restructuring.
