Business valuation is the process of estimating the economic value of a company. In simple terms, it is to determine the current worth of a business considering all its elements and stakeholders.
Business valuation is usually conducted during a merger or an acquisition – either the company is buying another, or selling itself wholly or a portion of its operations.
When purchasing or selling a business, it is crucial to set aside personal feelings for a more realistic, accurate, and explicit valuation. This helps to find a selling price that does not undersell the business yet still attracts potential buyers.
The Role of Business Appraisers
When you hire a professional business appraiser, you gain from his or her expertise, and receive an objective formal valuation.
Business owners, in order to save time and money, would usually skip this step. But in the attempt to save a few dollars, they have actually placed themselves at a great disadvantage.
Evaluating a business is an onerous task, and you do not want to end up with a price that is irrational or improbable.
Establishing a fair and rational value of a business is both an art and a science. One evaluation model cannot be use across all types and forms of businesses. However, with the numerous methods available, choosing the right one inevitably becomes a subjective task. Hence it is important to exercise prudence and judiciousness.
The report should detail the nature of a business and its operations and processes. This can be done using different business analytical methods like the SWOT (Strength, Weaknesses, Opportunities, Threats) analysis.
There are internal and external factors affecting the worth of a business, such as political, economic, social, technological, legal and etc. All these trends should also be considered in the evaluation.
A financial section includes the company’s past performances and forecasts of its future operations, and a comparison report of its financial status with comparable companies. All these are valuable insights to determining a company’s worth.
How To Use The Appraisal Report
The appraisal report gives an approximate value of the initial price of your business so it is just the tip of an iceberg, not sufficient for negotiations with an actual buyer.
Having the report is not enough. You need to understand the buyer’s needs and use the information in the report accordingly.
With a strong reason for the acquisition, the buyer may be willing to pay an extra amount or premium for your company. On the other end, the buyer may also offer a lower price when the business valuation is based on certain assets.
When the estimated business value is non-satisfactory or unacceptable, the owner can improve on it through enhancing the efficiency of the company. As businesses with a greater potential of growth tend to be more irresistible, the increase efficiency can lead to an increase in the value of the business.
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