The basics of business valuation
Business valuation is a topic that’s important if you have plans to grow your business — and, frankly, who doesn’t? This process allows you to get a sense of what your business is worth in the eyes of the market, which can be beneficial if you plan to sell or bring in new investors. It’s also critical for finance purposes, including reporting and taxes.
What are the methods of valuation?
Business valuation can be carried out in several different ways. The most straightforward, Investopedia contributor Adam Hayes notes, is market capitalization. This approach only applies, however, if you’re a traded company as it multiplies share prices by outstanding shares to create a numerable value.
This approach won’t work if your business is just starting out. Hayes suggests that the root form of business valuation is liquidation value, which simply totals up what your business would be worth if all assets were liquidated. As for accuracy, Hayes suggests the earnings multiplier method, which estimates earnings potential by weighing cash flow and profits.
Who performs a business valuation?
The approach to a business valuation you take can depend on where you’re at in your business and how you plan to use the information. You can also have multiple valuations performed to gain a more comprehensive picture of your business. When it comes to having the valuation performed, Entrepreneur’s Sam Harrop notes that you have several reliable avenues.
Among the professionals you can pull into an official business valuation are qualified business advisors, real estate professionals, and accountants. Investopedia’s Julia Kagan also notes that there are certified public accountants who are specially qualified to perform valuations. These CPAs will carry the designation Accredited in Business Valuation, which comes after completing 60 hours of training and meeting other requirements.
Why you may need a business valuation
The purpose for a business valuation will depend on where you are in your business and what your goals are. Russell Smith, writing for Business.com, suggests that one of the main reasons for a growing business is attracting investors. A business valuation can show possible partners and investors the trajectory of your business and give them more incentive to come aboard.
A business valuation is also used to determine eligibility for a bank loan. Your business’ assets can be used as collateral, so a valuation could significantly impact what you are able to borrow. If you plan to sell your business outright, a valuation will ensure that you get the maximum dollar amount for what you’ve built.
No matter the reason, you can take an active role in the business valuation process beforehand. Bharat Kanodia, a contributor for Inc.com, suggests taking steps to improve revenue before seeking a valuation as it can improve the results. This might include bolstering profit margins by cutting expenses and investing in automation to demonstrate the potential for long-term growth.
If you believe you need to have your business valued, seek out a certified public accountant with the Accredited in Business Valuation designation. You can also consult with industry peers who have had valuations done in the past and ask questions about their experiences.
The information in this article was obtained from various sources not associated with Adirondack Bank. While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. Adirondack Bank is not responsible for, and does not endorse or approve, either implicitly or explicitly, the information provided or the content of any third-party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. Adirondack Bank makes no guarantees of results from use of this information.
Source: IMakeNews, Inc.
