Apr 28 Potential Business Valuation Problems
There are many different reasons to conduct a business valuation. Most individuals—and even most business owners—think of a business valuation as something that takes place just before a business is bought or sold. In fact, many companies undergo a business valuation on a more regular basis for tax reasons, internal or external auditing purposes, strategic planning and a variety of other business-related purposes.
An individual business owner may also seek out business valuation services for reasons that are relevant to his or her personal tax situation or personal financial plan. In addition to the many rationales that exist for a business valuation, there are also a number of different ways to value a business.
Methods May Differ
Valuations may be based on current or projected revenue, on a business’s assets, on the value of comparable business’s in the same market or some combination of these factors. Different valuation methods are utilized for different purposes and some may be more common within a particular industry than others.
While the reasons behind a valuation and the valuation process itself are complex and variable, the problems that tend to plague business valuations are relatively straightforward. To avoid the following list of common potential business valuation issues, business owners should contact a Clifton NJ business valuation expert for help that is specific to their situation.
Lack Of Independence
Objectivity is the goal of all business valuations, but it is easy for bias to creep into the process. Even the most analytical accounting professional is susceptible to preconceived notions about the past or future of an industry and allowing those judgments to affect the valuation. As the process goes forward, a business valuation professional has access to more information about the company which often makes it more difficult to be objective. An experienced financial services firm or independent professional will be able to explain measures they take to mitigate the potential for bias to affect their valuations..
Lack Of Certainty
Often, even the best business valuation experts will be faced with uncertainty regarding how to interpret some aspect of a business or how a particular aspect affects overall value. The difference between experienced and inexperienced business valuation professionals is often the tools they have developed to deal with this uncertainty when it presents itself.
Lack Of Simplicity
More so than ever before, business valuations can quickly become complex to the point of incomprehensibility. The reasons for the increasing complexity of business valuation include globalization and accounting standards. As more and more U.S. companies globalize—that is, move all or some of their business to one or more overseas locations—they become more difficult to value; this is because physical or financial locations in more than one country means more than one currency must be considered during the valuation. Since currency values fluctuate frequently relative to other currencies, this makes it more difficult to pin down an objective valuation.
The increasing complexity of accounting standards, which is also tied to globalization to some degree, also plays a role in how analysts conduct business valuation. Another layer of complexity is added when it is considered that modern data modeling capabilities have increased the number of options that business owners have when seeking a valuation. Overall, it is more necessary than ever before to have experienced, professional help with a valuation. It is also advisable to hire a business consultant to help improve operations & focus on increasing the valuation.