Why is Business Valuation Important?
08

Apr 2020

Human tend to have the inclination of measuring the value of each and everything they spend the money on. Establishing a business involves vast risks, so it becomes all the more imperative to check its economic worth from time to time. Business valuation can be well-defined in several ways, but in layman language, we can explain it as. Business valuation is the process and a set of procedures used to estimate the economic value of an owners interest in a business.

What Determines a Business Value?

There are multiple ways to determine the value of your business.

Income Approach

Value is based on expected income generation

Asset Approach

Value is determined based on business resources

Market Approach

Value is based on previous sales of shares of this or a similar business

How to Determine the Taxable Value of your Business?

The best way to determine the value of your business is to find a qualified appraiser. Determining the value of your business is not something you should attempt on your own, especially in light of the fact that the IRS could challenge your valuation.

What are the Methods of Valuation?

Most capable, independent business appraisers use one of the following business valuation methods.

  1. The capitalisation of Earnings – The calculation starts with yearly earnings over one or more years. It then divides earnings by a “cap rate” that replicates the cost of capital and the risk of the company.
  2. Discounted Cash Flow – This technique, often used to value new firms or companies while unstable earnings, begins by estimating future earnings over several years.
  3. Comparable Discounts and Sales – Some appraisers alter their estimate of value based on recent sales of similar companies in the same market or industry.

Five Reasons for Business Valuation

Here are the reasons why valuations are essentials as your business continues to grow and evolve-

1. Valuation Provides a Baseline

Regular valuation provides a baseline. They serve as an indication of what you are doing right and what could be doing better. Some times your value may be up, other times it may be down a little bit, mostly in the event of a market correction.

2.Valuation Measures Growth

Implemented regularly, valuations provide a pretty good measure of how you are doing compared to the path you have set for your business. To be most effective, costs should be utilised in tandem with your strategic business plan and must be referred to as a component of any significant decision.

3. Valuations Can Identify Gaps

A comprehensive assessment will utilise key performance indicators to look at the non-financial aspects of a business that are the fundamental value drivers. Examples are client demographics, technology usage, corporate structure, and reliable infrastructure.

4. Valuation Provides a Yardstick for Future

With less to no public data available on what big business in this sector sell for (the enormous majority of deals are never published), knowing your baseline value can allow you to target yourself (via KPIs) against your peers, as well as “Best Practices” standards.

5. Valuation Provides Doorway to Capital

If you are thinking of borrowing capital for an acquisition or other business investment, any lender will want to know what control lies in your company. Your valuation is the first step in the procedure of securing capital.

Once your firm’s valuation has been established, set new objectives to surge the company's value over the next year, every year, you should set time apart to associate the previous years' assessments to measure growth, losses, and notice where room for development is.

JAXA Chartered Accountants are here to help you with your business valuation. Our advisors are well-versed with the legal formalities and can make the process hassle-free. Contact us today to know more.