Setting up a business can be a very daunting task, but when this task is completed, it is not the end of the road. It is vital for a company that should know its value in the market. This will help the management to understand the current workings of the business and will also allow them to make a strategy for the future. The business valuation also plays an integral part in joining hands with new partners and acquiring new creditors and suppliers and thus, is a crucial task which needs to be performed regularly by a business.
Meaning of Business Valuation
A Business valuation can be defined as a set of processes which when performed, help in estimating the economic value of the business. It essentially conveys the monetary value of a business entity. This process helps in establishing the fair value of the business which is further helpful any mergers and acquisitions, takeovers and the various negotiations between the partners of the company. Let’s have a look at the crucial part it plays in the life of a small business.
Importance of Business Valuation for Small Businesses
The valuation of a company is a very technical process. The person valuing a business should be having an in-depth and complete financial knowledge and should also be well versed with the business model of the company. Some of the essential features as to how business valuation can help us are given below:
- Assists in the Financial Reporting
- Resolves any Legal Disputes
- Allows for Buying and Selling of Business
- Computes the Total Assets
- Focuses on Future Strategies
- Helps in Accumulating Funds
- Figures out the Tax Liability
- Assists in Partnerships or Future Mergers and Acquisitions
The points mentioned above make business valuation a necessary tool for the management and the shareholders alike. The main focus of the business should be to increase the value of the company in the market. The higher the value of the business is, the greater the people trust the company. Let’s understand the various factors that can affect the business valuation of an organisation.
Factor Affecting Business Valuation of Small Business
There are many factors a change in which can affect the valuation of a small business for better or for worse. It is vital for you to keep an eye on these factors and try to keep them in check so that you can maximise the business valuation to its fullest. Some important factors to consider are:
1.Growth Potential of the Business
The prospect for growth plays a significant part in the life of a business and has the potential to determine the company’s future. If the potential of the growth of the business is high as well as the estimated growth of the sector in which the business is present is also rising, then the value of your small company would increase in the market.
You might have a unique idea and an excellent business model still, it is possible that this may not add as much value to the company as expected if the company is located in such a spot which as less potential for growth. Location of a company and its locality can turn out to be the critical factor when it comes to business valuation.
Though putting a value to the reputation of the company can be a complicated matter, nevertheless is one of the most significant factors which has the potential to make or break a business. A positive reputation of the company will help in acquiring more customers and will also benefit the company to venture into new markets and produce new products. It can significantly increase the value of the business.
An encounter with a quick-thinking management team and a reliable and skilled staff can leave a lasting impression in the minds of the customers. Thus, the employees of a company can help in determining the value of a company.
The customer base provides us with the knowledge of the potential risks and also helps in determining which segments it should explore more. A more significant customer base would mean that the company can handle many different types of customer segments which would help in increasing its value in the market.
If a company or business can influence the above mentioned five factors, the company can see a higher valuation in the market. There can be many other factors too but swaying these factors can be comparatively easier. Every businessperson and entrepreneur should make it a habit to perform the valuation of the business at regular intervals.
At JAXA, we have teams of knowledgeable specialists who can provide you with expert and professional advice about all your business related and can guide you till you reach to the solution to your problem. We also offer other assorted services such as Cash Flow and Forecasting Services, Corporate financial services and many more. In case of any questions, please contact us, we’d be glad to assist you.