Business valuation is simply the process of calculating the true, fair market value of a business. To achieve that, there are many methods that can be used to conduct a business valuation.
There are many reasons to why you would want to conduct a business valuation, some of the more common reasons are:
- Sale of a Business
- Legal / Tax planning
- To attract investors
- To raise capital and apply for bank loans
- To support business growth / Business Planning
- Succession Planning / Transition
Let’s briefly look at some of the main methods of valuing a business:
- Market –based valuation
- Asset-based valuation
- Discounted cash flow
- Capitalisation of earnings
In choosing the right valuation method, you will need to take into account several considerations such as the nature and context of the business. Generally speaking, the current and past years accounting figures should be accurate and future estimates must be reasonable and fair.
An inflated valuation will skew your understanding of your business and scare off potential buyers. On the other hand, undervaluing your business would mean you are missing out on selling your business for potentially more.
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