business valuations

Why Do Companies Need Business Valuations?

Business valuation reveals the current financial condition of the company, allows you to comprehend the business in terms of factors affecting the amount of profit per share of each partner, makes a “diagnosis,” and suggests methods of treatment or prevention.

What Is Meant by Business Valuation?

Starting any business is based on the idea of making money. However, in order for the result to meet expectations, it is worthwhile to competently build a development strategy, highlight your undertaking against the background of competitors, and assess its viability in real market conditions. Any business has its own value. At the same time, it does not consist only of the value of the property but also of many other factors that have no explicit material expression. Why do we need a business valuation?

Business valuation involves determining the total market value of the company or its individual shares. There is an erroneous belief that business valuation is a costly procedure that is used only in an exceptional situation. In fact, a timely assessment of the company makes it possible to competently organize business processes and prevent an internal crisis.

Enterprise valuation is the determination of the market value of your business. The need for this procedure arises in a number of legal situations and provides the owner of the enterprise with special advantages. The assessment implies a complex procedure, which consists of several stages and requires special knowledge from a specialist.

Objectives of Business Assessment

We can conditionally say that there are two main final goal settings for business valuation – either in order to liquidate it or, conversely, to develop it further. The most common reason a business is evaluated for termination is for sale. In this case, both parties are interested in an independent assessment – both the seller and the buyer, which is completely understandable.

There is another much rarer case of valuing a business for its liquidation. This applies to situations where one of the partners goes out of business. At the same time, the partners who remain in business consider it necessary to pay a share, not in the form in which it is determined by law but based on the real value of the enterprise (which is often higher than the formal one). That is why a business valuation is needed when it is liquidated.

Business Valuation and the Need for It

The business valuation is a strategic document that helps owners and top management in making significant management decisions. This is especially true for non-public companies: the market is a living organism, and its indicators change regularly. In times of uncertainty, we see this clearly. Additional funding or adjustment of the management model should be based on solid numbers from an independent assessment.

Most often, a business valuation is required for its sale. Buying a business is a serious step, so the presence or absence of an expert assessment of its value and potential profitability can determine whether the buyer decides on a deal. An independent opinion on the value of the business is a document that reflects the real market value of the enterprise and allows you to conduct reasonable negotiations, thereby increasing the confidence of the buyer. Business valuation allows:

  • enhance the efficiency of company management;
  • substantiate the decision of investment projects;
  • prepare the basis for drawing up a business plan;
  • find out the level of creditworthiness of the company.

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