Top 6 Reasons for Business Valuation
Business valuation is the process of finding the best estimated worth of a business. A reliable business valuation then involves only the substantial principles and justifiable methods, and the additional step of finding the value of a business. The main approaches to determine value are the asset approach, the income approach and the market approach.
Here are the top 6 reasons for business valuation:
1) Mergers and Acquisitions
In mergers and acquisitions, it is crucial to determine the fair value of the businesses involved. The acquirer needs to know the value of the target company to make informed decisions on the purchase price and negotiating power. On the other hand, the target company needs to know its value to assess if the offer is fair and reasonable. A business valuation can help both parties make informed decisions and ensure a smooth transaction.
2) Litigation
In some legal disputes, the value of a business may be a significant factor in determining the outcome. For example, in a divorce case, the value of the business may need to be determined to divide the assets fairly between the spouses. In a shareholder dispute, the value of the business may need to be determined to assess the damages suffered by the shareholders. A business valuation can help provide an objective and reliable estimate of the business’s value for legal proceedings.
3) Financial Reporting
In some cases, businesses may need to provide financial statements that reflect the fair value of their assets and liabilities. For example, if a company acquires another company, the assets and liabilities of the acquired company may need to be valued at fair value for the financial statements. Similarly, if a company owns intellectual property, such as patents or trademarks, these assets may need to be valued at fair value for financial reporting purposes. A business valuation can help provide an accurate and reliable estimate of the fair value of these assets.
4) Breaking of Partnership Settlement
For various reasons, a partner may want to quit halfway and request to be out of the deal, or the others may want to absorb his share of the business. Here, a business valuation would equip both parties with the best estimated worth of the business and the leaving partner’s interest so the best decisions can be made to protect individual interests.
Families seeking a fair split amongst the members of business and assets can also use do business valuation for a smoother settlement.
5) Inheritance and Estate Planning
When there is a need to pass down or pass on or hand over privately owned business and assets, it is necessary to inform the recipients or relevant authorities of the value of these possessions, especially when taxes are involved. Hence business valuation is done to help validate the amount of transactions following the transfer of ownership.
The proper information from a business valuation will facilitate more accurate transactions and proper planning.
6) Buying and Selling Business
Often, buyers and sellers have a broad sense of the worth of a business, which may not be an accurate representation of the actual value. Even if their gauge of the value was near accurate, it may not be accurately represented with their inadequate skills and knowledge. From the past dealings, they would usually ignore the tangible or intangible assets or business risks; use inaccurate earning multipliers or discount factors; and miss out on more efficient ways to profit-sell non-core assets.
Hence a business valuation will give the most accurate and valid representation of the actual value of the business, which helps to negotiate the best deal and the most profits.
Conclusion
A business valuation can serve various purposes, and it is essential to conduct it with valid principles and methods. Whether you are considering buying or selling a business, settling a partnership dispute, or planning your estate, a business valuation can provide valuable insights and help you make informed decisions. Therefore, it is recommended to consult a professional valuer to ensure the accuracy and validity of the valuation.
There are other circumstances that call for the need of a business valuation, and it is always wise to clarify with a professional valuer. Whatever the circumstances, business valuation must be done on the grounds of valid principles and methods.
Speak with a Qualified and Experienced Valuer.
