When it comes to your business, it's essential to know its worth. A business valuation will help you determine the financial value of your business. This allows you to make informed decisions about your company's future and better understand its economic viability. This article is designed to help you understand a business valuation and why it is crucial. It also discusses the different business valuation methods and how to value a company.
What is a business valuation?
A business valuation is an assessment of the financial worth of a business. It's important to have an understanding of what your business is worth so that you can make the right decisions when it comes to negotiating a sale, purchase, or when it comes to taking out a business loan. A business valuation can also be used to determine the value of a company's assets, such as property and equipment, as well as its liabilities, such as debts and outstanding loans.
A business valuation is often used in the context of investment, a merger, or an acquisition, as it helps to understand the worth of the company in question. It's also used in the context of a business loan application or when splitting up or restructuring a business.
Advantages of a business valuation
There are several advantages of a business valuation for your company:
Firstly, it helps you understand your business's current market value. This allows you to better understand the company's financial position and make informed decisions about its future.
A business valuation can also help you secure a better deal when selling your company. By understanding the worth of your business, you can be sure to get the best deal possible when negotiating a sale.
A valuation can help during a purchase of another business. Purchasers often underestimate and sellers over estimate, so it is important to get a 3rd party that is at arms length and has no stake in the outcome.
Finally, a business valuation can help you reduce risk when taking out a loan. By understanding the worth of your company, you can take out a loan within your financial means.
What are the different business valuation methods?
Several different business valuation methods can be used. These include:
Market approach or comparative value – This method looks at valuations of recent transactions of similar businesses in the market to determine the value of your business.
Income approach or earnings – This method looks at the business's ability to generate income at an acceptable return when determining the company's value.
Net Asset approach – This method looks at the net value of the assets, such as property and equipment, and considers this when determining the value of the business.
Discounted cash flow (DCF) – This method looks at the business's future cash flows and takes this into account when determining the value of the business.
Earnings Multiples - This method looks at the business's value based on the multiple applied to earnings. The multiple is based on the type of business. For example, the multiple applied to a technology company and services business would differ significantly.
How to derisk your purchase of a business
When it comes to purchasing a business, it is vital to understand the worth of the company you are buying to ensure you get the best deal possible. A business valuation can help you derisk your purchase by better understanding the financial position and the free cash flows the company generates that you want to buy. It is worth paying for a business valuation yourself versus taking one that the owner or business broker helping to sell the business has done. You are taking all of the risks, so it is essential that you know exactly what you are buying.
How to get a better understanding of financial viability
A business valuation can help you to get a better understanding of the financial viability of a company. This allows you to make informed decisions about the future of the business. When it comes to selling a business, owners always feel their business is worth more than it is because they have put their blood and sweat into it. A business valuation 3 to 5 years before selling a company gives the owner time to make changes to the business to help increase the value and get a better price when they want to sell.
When someone is looking to borrow money to purchase a business, the lender will often ask for an independent business valuation before loaning the money for the purchase. They do their own base valuation, but they are also looking to compare it against an outside valuation report. The valuation also provides you with an understanding of the financial viability and areas of improvement, so once you own the business, you can start making any necessary changes. If the two parties to the transaction are not dealing at arms length, the CRA will require an independent assessment of fair market value, and this must be completed by an independent valuator with the appropriate skills.
Who can perform a business valuation?
A business valuation can be performed by an accountant, a financial advisor, or a business valuation specialist (Chartered Business Valuator). It is crucial to select a qualified professional experienced in performing business valuations.
It is also important to select a professional familiar with the type of business you want to value or someone who will spend the time during the engagement to get an in-depth understanding of your business. This ensures that the valuation is accurate and that you get the best advice possible.
What to consider when selecting a business valuation company
When selecting a business valuation company, it is vital to consider their experience and expertise. It is essential to consider the fees that they charge, but more important is the quality of the work and the processes they use for performing the valuation.
It is also essential to consider the company's reputation and the reviews they have received from previous clients. This will give you an indication of the quality of their work and the level of service that they provide.
Conclusion
When it comes to your business, it is crucial to know the worth of your company. A business valuation helps determine your business's financial value, allowing you to make informed decisions about its future and better understand its economic viability.
By understanding the worth of your business, you can ensure that you make the right decisions when it comes to negotiating a sale or purchase or when it comes to taking out a business loan. \
To determine your business's worth, it is essential to consider a business valuation. At RK Fischer & Associates, our business partner, who is a CPA and has extra training in business valuations performs our business valuation engagement for our small business clients who are both the buyer and the seller, as well as for financial institutions that are looking for an independent valuation. We use our own methodology to gather in-depth information about your business and financials to make the valuation as accurate as possible. We perform all valuation methods except the market approach, which requires information on recent sales of similar businesses in the region and industry. We will not perform business valuations if it is needed for court proceedings which arise in a dispute, such as a shareholder or matrimonial dispute or estate settlement. In this case, we will recommend and refer you to a Chartered Business Valuator who has training in court proceedings and evidence presentation.
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