Reasons Why You Should Perform Business Valuation

Businesses operate under different environments which makes them unpredictable. A company can be successful today with an impressive balance sheet and be placed under receivership the next day. Many managers and investors only think of business valuation when there is a crisis or when they want to find best offshore company formation service to sell or set up another business. However, understanding the value of your business before things get out of hand can help you manage the crisis better by making informed decisions.

The Importance of Business Valuation

There are several reasons why entrepreneurs and investors choose to value their business. As mentioned earlier, one of the most common reasons is when they are looking to find best offshore company formation service to sell or buy a new business. Other reasons include the below aspects.

To Capitalize on Emerging Opportunities

It is common for investors and business owners to find themselves in positions where new opportunities arise and are in their best interest. As such the opportunities may require large capital investments but investors may not be able to raise the funds quickly enough to seize them. Performing a business valuation is important in determining the required capital injection as well as the rate of return for such an investment. It also makes it easier to raise capital either through lenders or other investors.

When Merging With or Acquiring Another Business

It is not uncommon for a business to merge with other businesses that are of strategic importance or acquire new ones for various reasons. During such a process it is important to determine the value of your company and others that you are merging or acquiring. Conducting a business valuation helps you to negotiate with other companies that you are entering into business with. Valuation is also important in terms of planning, it enables you to convince other firms about your business values and their importance.
The type of assets you are holding and the reasons and benefits of holding them as well as how your company has transformed over the years and how it will continue to evolve. As the seller, you will be in a better position to know if the buyer is offering a lower price than the real worth of your business. Therefore, you will be in a good position to reject the proposal and wait for a better deal simply because you are aware of the value of your business.
When Considering Financing Options
Financiers will always determine the value of your business before they can inject their hard-earned money into your business. It doesn’t matter who it is, so long as they are putting money into your business, they will always want to validate their investment to determine if it is a viable business and whether it is worth the money they are investing. They will also want to know if the business is profitable enough to provide an attractive return on investment (ROI) and there is no better way than conducting a business appraisal.

Estate Planning
It is usually advisable to perform business valuation as part of your overall estate. This is mostly done during estate planning or when the owner of the business wishes to gift an interest in the business to another person or when the owner of the business has passed on.

Different Approaches for Conducting Business Valuation

The Income Approach
The income approach is one of the most common ways of valuing a business. The approach focuses on the amount of cash the business will be generating in the near future while assessing its risks. The income approach is divided into basic methods namely, cash flow method also known as the capitalization of earnings approach and the discounted cash flow method.

The Cash Flow Approach
Under this method, the business is valued by capitalizing its future profits. The profits should be maintainable and the calculations are done by considering past and projected earnings of the company. The earnings taken are usually within 5-7 years after necessary adjustments of unusual, non-recurring, and other items of both income and expenditure.
Discounted Cash Flow Approach
The discounted cash flow method estimates the value of a company by relying on its future projected cash flows. This method is considered one of the most rigorous methods of performing business valuation since it takes into account some important aspects. The future cash flows are obtained from regular business activities and are discounted at a specific weighted average of the cost of capital. The sum of the discounted cash flow is regarded as the value of the company. Some of the business aspects taken into account by the discounted cash flow method include
l Estimates of the future cash flow
l Value of outstanding debt
l A specific time frame of the cash flow
l A specific discount rate which is applied to the cash flows
l The terminal value which is the total cumulative value of the projected cash flow going beyond the explicit forecast time frame. Other important valuation methods are,
l Asset-based method
l The market-approach


Performing business valuation can help companies to calculate the fair value of a business for reasons like taxation, sale value, etc. Understanding the value of a business can help you to sell or buy a company wisely

In this article