The Advantages of Getting a Business Valuation

Graphic by Nick Youngson /

A business valuation refers to the set of procedures used to determine the financial value of a company and its assets. This process is often undergone by business owners who wish to sell their businesses and is also conducted prior to mergers, organizational realignment, and partnership dissolution.

Different elements must be considered when valuing a business. While the company’s bottom line is important, there are other factors to think of like the industry the company operates in, its records and financial position, its competitors, and even the state of the economy

When properly done, the results from a business valuation reduces chances of disagreements regarding the worth of a company. It can also serve as a marker by which the business is taxed, and shed light on how much life insurance will be needed to finance the purchase agreements each party agrees to. The following are the benefits of business valuation.

Buying and Selling

One reason companies go through business valuations is to sell their business. By conducting a business valuation, the true amount that should be paid is made clear to the buyer. The advantage for sellers is that the results help them not to undervalue their business. Even though the process may sometimes be subjective, astute owners keep valuation numbers handy so they have a head start when negotiating for their business. With good valuation data, both buyer and seller get a fair price, and fair deals are lasting deals.

Relationship Dissolution

When founding partners seek to part ways, a business valuation provides a fair method of not only valuing how much the company they built is worth, but how much each partner’s stake is worth so they can be bought out.

A Tool For Making Decisions

Results from a business valuation can be used as a decision-making tool because they consider current market conditions. The process helps business owners navigate the state of the market in order to know if it is a good time to sell the business or to hold out for a more opportune time when they can get higher prices.

Management Drive

Routinely valuing a business is a good practice. It keeps track of management’s performance and sheds light on their strengths and weaknesses. It also shows them what parts of the business need more attention so they can focus and put their best foot forward in those areas.

Listed Entities

Firstly, when going public, the share price of a company is determined by the results of its business valuation. In certain cases, interested parties can decide whether or not to trade on the shares of a company on the stock market by comparing its price to the valuation results. The results can also be used to compare the value of different entities. Portfolio managers also use valuation results to compare corporations and determine where to focus their portfolios.

Planning and Strategic Decisions

Conducting a thorough business valuation is the first step in deciding whether to buy or sell the company, to grow it independently or to join forces with other businesses.

A business valuation also helps companies make decisions about which product or service lines to keep growing, or which client relationships to nourish or sever. A regular valuation also serves as a marker to measure if a company is truly creating value to the market it claims to serve.

Valuing a business is important, whether you wish to sell it, part ways with a partner, or make fate-changing decisions. Used properly, it can be a tool to help the company plan for the future. Looking much closer at a company’s current and future earnings will help business owners determine what areas to focus on building and the more accurate the value derived, the more useful the result of the business valuation will be. Please reach out to us at A. Neumann & Associates with any questions you may have and we will be happy to assist you!