For many small business owners, their business is the most valuable asset. If you want to find out what your business is worth, know that you can’t determine its value by just looking up the stock price. What you need is a business valuation that will cover every part of your building and operations for a set number.
It’s a formal process that’s part science and part art. It relies on any propriety technology the business owns and any unique know-how. Then, there’s the professional evaluation done by an analyst, who considers the business’s financial performance, its nature, national and local economic conditions, liabilities and values of assets. These factors are taken into account to arrive at an estimated value. To complete this process, most people hire professionals, such as Llyods business brokers in Melbourne.
Following are the reasons why you might find the need for a business valuation:
- Sale or merger to another entity
- Raising investment capital
- Change in ownership because of retirement or succession planning
- Gifting the business shares to children in succession planning
- New partner or shareholder coming on board
- Estate tax purposes
- Finalising divorce
- Annual update or establishment of an employee stock ownership plan (ESOP)
No matter the reason, you will have a better chance of finding out where your business stands by hiring an experienced professional to perform the evaluation. Ensure the analyst you hire belongs to a company that holds the right credentials and certificates to do the work.
This way, the result will be more defensible and reliable if the matter goes too far and you have to make a court appearance.
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Determining the Value of Your Business
Business appraisers, such as Llyods business brokers in Melbourne, use three primary approaches to find out the value of the company:
Income Approach:
Evaluates the benefits from an investing point of view against the return for any assuming uncertainty and risk associated with it. It accounts for the changes in the business’s working capital needs, revenue growth, differences in financing, and future capital expenditures.
Market Approach:
The company is evaluated based on final transactions of similar companies.
Asset Approach:
The company’s assets are measured at a fair market value, less its liabilities. This approach is mostly used for underperforming companies and, therefore, is not right for those with high value.
Now that you know the basics of a valuation service and what it helps accomplish, let’s take a look at its benefits:
Reveals Accurate Business Value
An evaluator does not utilise market data to come up with a rough value estimation of the business. Instead, they understand the immediate company value use this priceless information to determine what the business is worth. They also appraise the valuation growth because potential buyers and investors often look for consistency, a sign of future success.
Reveals Business Resale Value
What’s your sale plan? Whether 2 or 10 years down the line, you need to know how your business appreciates over time. It’s vital to know your business’s value before it goes on the market because buyers want to know how well-known you are.
The evaluation also includes the business’s strengths and weaknesses because it helps achieve a higher listing price. After the evaluation, the business owner must work doubly hard to boost profits, improve processes, invest, increase sales and lower expenses based on the insights.
Gives Insight into Acquisitions and Mergers
During a business acquisition and merger, your negotiation power is your greatest knowledge during a business acquisition and merge. If an interested party makes an offer, you should present an accurate image of the company’s value, projected success, past growth.
If the right value is not determined, purchasing parties might counter-negotiate the value. They will then make an offer that is not worthy of the business. A fair evaluation allows you to either proceed with negotiations or reject the offers.
Provides Access to Investors
When investors decide to invest in a company, they want a full valuation report. So, if the evaluation reveals that your business will see severe downfall or growth in the coming months, now is the time to start approaching investors.
Helps Determine Fair Market Value and Fair Value
The business’s fair market value determines what the business is worth in the marketplace. Estate transactions, ATO-controlled transfers and a direct business sale receive fair market value. On the other hand, fair value is based on business valuation alone and does not include market discounts. Thus, the value is based on calculations made during marital dissolution cases, shareholder disputes and sell/buy agreements.
In conclusion, a business evaluation offers you precise information about your company’s value and how much you will make if you plan to sell it in the future.
