There are plenty of reasons why business valuation is important. The importance of business valuation is often described as required to obtain good insurance coverage, it’s necessary when looking to reinvest into the company and whenever a sale of the business is on the horizon. But not only that, starting and running a business is a risky endeavour, so it is crucial to check its value to asses risk.
To put it simply, business valuation is a process used to estimate the economic value of the business. However, it is not just about slapping a price on the business. While it does involve making certain assumptions about the business, it does have a wide range of methods to make a more accurate valuation, so don’t jump the boat and just assume it is a made up number.
Correctly assessing business valuation is a fundamental part of business growth and development. Here are a few things to know about the importance of business valuation:
In buying and selling of a business
Whether you are buying or selling a business it’s crucial to have a business valuation. Often, we see businesses acquiring or merging with others in order to get more profits or consolidate them. Deals like this require a valuation to show the acquired/new profits. Also, such consolidation of businesses requires a valuation in order to not only pay the fair the market price for a new business but to establish the level of goodwill as well. While creating such consolidation can be a trickier task then just evaluating a business there are plenty of software programmes that can help you with that, like ProForecast.
Stelling legal disputes
Disputes while common in the corporate world, is not the most pleasant to deal with. Oftentimes they happen due to the disagreement in the joint venture, partnership issues, breach of contract or other damage. And dealing with such disputes often requires solicitors to investigate the actual value of the business to estimate the potential damage. Outcomes on such cases are also often relevant to the actual value of the business, it might involve settlement or sale or shares or in some extreme cases sale or liquidation of a business.
The type of valuation that most of the businesses will meet will be for financial reporting purposes. Financial statements nowadays are often prepared by adopting a fair market value of the business to determine the value of the current assets and liabilities. Such valuations tend to be more reliable and help the management to make better business decisions.
Additionally, this type of valuation can help a business protect its intellectual property and show the true value of the property, which can come in useful when your business is primarily trading in intellectual property. Moreover, such valuation will help your business in assessing it’s tax liabilities and organisations are often interested in business valuation so that they have to pay as less tax as possible and having a major portion of profit left of either dividend declaration.
Better business decisions
The business valuation report will also have some serious impact on your strategic planning as it tends to show the points where the management can make better future business decisions in order to improve the current market value. This is often done by looking at the points where business can improve and investigating it further and also it can highlight the positive points in the business to help to reinforce the policies associated with them.
Management can also use business valuation report in order to form the future dividend policy as well as design the new capital structure. It can help with deciding whether or not to undertake diversification or expansion of the business too.
The most obvious point here is that businesses need a valuation in order to get funding. A well-evaluated business adds credibility for the investors and future stakeholders as well as a piece of mind for the future of the business. Such risk assessment helps regulators confident about the funding transparent too.
While there are far more reasons why a business needs a process for a valuation, one can clearly see the importance of business valuation.