Business valuation is one of the essential parts of running a business and is integral to many business ventures. When you run a business, you may often wonder whether it’s still worth it to keep going, whether you should change your strategy or keep your business the way it is. However, you can get answers to these questions if you know the worth of your business. Business valuation services will help you find out how much your company is worth if you decide to sell it or if you decide to seek outside investors for funding or loans. Here are instances where you might need business valuation services now or in the future.
1. During Acquisition
When you are looking to buy a business, it is essential to know the value of a company. If you are purchasing a business from an individual or another corporation, you will want to ensure that the acquisition price is fair. A qualified business valuator can help with this process by giving an objective opinion on your purchase’s value and providing both sides with the necessary information. For example, business valuation services can help you understand a company’s net asset value (NAV) and how much working capital is available.
These numbers help determine a given transaction’s enterprise value (EV). Every business has different assets and liabilities, whether a law firm or a software company. By using accurate financial statements and making some calculations, a qualified business valuator will help determine the true worth of a business before investing in one.
2. In Merger Transactions
In mergers, like in acquisitions, business valuation services are essential to help ensure a fair deal for both parties. When one company acquires another, it’s vital to have an objective third-party estimate of the fair market value of the target company. These figures often become an essential factor in negotiating the terms of a merger agreement.
Each merging company wants to make the deal attractive to its shareholders and stakeholders and give an accurate representation of the worth of its company. The more precise this figure is, the better chance you have of avoiding protracted negotiations that can hold up the completion of the deal. Hence, hiring an experienced and reliable business valuation company with enough financial sophistication and technical know-how is crucial.
3. When Redefining the Scope of Your Business
When redefining the scope or objectives of your business, it’s important to re-evaluate what your company is worth and if you have the resources to take on a new business venture. For instance, let’s say you want to sell off one of your divisions to invest in another line within the company. You would need a valuation to know how much value is in each division so you can figure out how much money you can generate from selling one.
If you decide to stop operating a particular line of your business or change its focus, then you may need a valuation for three reasons:
- To determine whether or not liquidating that line makes sense financially
- Because investors are likely interested in the future potential of that line
- For tax purposes, because there will be write-offs for losses associated with ending that line
The same holds when expanding a particular line of your business by adding new equipment, adding additional people, etc. A valuation is necessary before making these decisions as they could impact profitability, debt levels, and shareholder equity.
4. When Starting an Exit Strategy for Your Company
When starting an exit strategy for your company, it is crucial to have a business valuation to help you determine the company’s value. That will help identify the type of exit strategy best for your business. For example, suppose you want to reduce your stake in the company but remain a part owner. In that case, a business valuation provides valuable information about how much your business can bring in through an exit strategy and what strategies would work best.
It will give an insight into whether or not selling equity or selling the company outright is more beneficial. It may also help decide whether a minority investment sale may be more suitable or an outright sale or recapitalization may be more appropriate. A business valuation report will help your business take the best course of action in its exit plan, be it through IPO, a merger, selling to a friendly individual, or any other exit plan.
5. When You Want to Use The Worth of Your Business as a Collateral
A business valuation expert is necessary if you need financing from a lender that requires collateral. If you are trying to get a loan, the lender will want to know how much your business is worth. Evaluating the worth of your company may require determining the following:
- The value of patents
- The value of inventory
- The value of equipment
- The number of employees
- Income and expenses of the company
- Sales projections for the next few years
A valuation analyst might look at past performance over the last three or five years and make projections on where things could go. That way, receiving financing for investments with banks and other financial institutions can be easy. However, it’s best to deal with experts who specialize in valuing businesses so they can give you the best advice on how to proceed with different aspects of your business.
Conclusion
A business valuation expert is an excellent resource for anyone who wants to know more about their company and the value of their business. Whether you’re ready to sell your company or just curious about what it might be worth, the advice of an expert is valuable towards making the right decisions at the right time and for better terms.