Business Valuation – What is it and Why Do You Need It?

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A business valuation determines the value of a business properly based on the overall business situation and the company’s financial health. Generally, the business valuation considerations may consist of, but aren’t restricted to, the business’s tangible assets, intangibles, liabilities, revenues, and net worth. A good valuation of your business will help prepare you for your initial public offering and help you determine what price to offer for your business.

Business Valuation

In a perfect market, the price of every business is exactly determined by supply and demand. However, business valuation is much more complex than that. It involves many factors that can go into determining a business’s price including, but not limited to: the financial statements of the business, the type of business (its technology or service), the experience of the management team, the location of the business, and competition. While all these things may seem insignificant, they do affect the price of a business and will be included in the business valuation.

There are several different methods of valuation that are used in the business valuation process. One of those methods is the cash-flow method, also known as the cash method. This is generally used by mid-sized companies that generate a profit. This is because the profit margin of this type of business is higher than that of other types of companies. Another method is the earnings accrual method. This method of valuation focuses on the ability of a company to add new assets or generate revenue in order to increase its market value.

The third method of valuation utilized in the business valuation of companies is the gross and net book value methods. The gross value of a business is the total value of all tangible assets of a business less the total amount of liabilities. The net value of the business is the total amount of money owed to the business (liabilities + assets) less the total assets realized via the gross value. This method of valuation considers current and future earnings projections from existing customers as well as future cash inflows. In addition, it considers the total economic value of the business, which is the present value of all future net worth of an owned business over its total lifetime.

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A company’s business valuation must be done in compliance with the Fair Value Comparison Act. This is a nationwide law that requires public reporting of fair market value information to assist home buyers and businesses who are considering purchasing real estate within the United States. This law was designed to provide a standardized set of guidelines for valuing businesses in order to facilitate home buying. The guidelines provide for an analysis of all relevant aspects of a company including, but not limited to, current earnings, future earnings, credit ratings, goodwill, and intangibles. When a business valuation has been completed according to these guidelines, then the property or real estate can be priced at an amount that will result in a fair market value for the business.

 

The most significant advantage to using a business valuation procedure is that the procedure provides the buyer with a more accurate picture of the true value of an asset. It is possible to get an approximation of the value of a business through the use of fair value measurements, however, the actual value of assets will ultimately vary based on a number of factors. One of those factors is the financial condition of the organization. A company may be in poor financial health and therefore the market value of assets may actually be below the fair value measurement. It is important to remember that the valuation is an analysis of all relevant factors and should never be used as a sole basis for determining the purchase price of any business.

 

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