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Why is Business Valuation Important to Your Investment?

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Is business valuation important while fetching for an investor

What is business valuation?

It is a procedure that determines the net present value of a business or organization. It is a form of intrinsic valuation used across accounting and finance to oversee an investment, company value, cash flow and capital. Furthermore, it determines the considerable value of a company for different reasons such as taxation, partner ownership, sale value and provides an estimated value of a company.

Business valuation is often an underestimated process that can act as an accelerator for enhancing the value of the business. With this in mind, valuation enables business owners to make better-informed decisions, ensure that it has the proper debt structure and identifying areas of strength and weakness which can be addressed.

Additionally, the process of business valuation leads to a more objective understanding of your company. It highlights areas where revenues and cash flows are improved and expenses reduced, resulting in higher profits. For this reason, when you evaluate your business, you have less certainty and accordingly minimize a company’s risk profile and improve business value.

Why value your company?

A valuation is not only about the profit and loss of a company, but it is about whether or not the company can stay sustainable over time. Thus, a business valuation can operate as a benchmark to determine the strengths and weaknesses that affect the improvement of strategic planning and elevate the overall company value.

Moreover, business valuation plays an important role when the business owner wants to sell or buy their company or even a portion of its operations. Business valuation allows determining the company’s estimated worth and looking into the suggested management, structure composition, evaluating future earnings and retail price.

 A weakness could be classified as a scope where the company is not operating at an ideal potential. For instance, business expenses can be discounted, employee productivity improved and boost marketing functions.

Similarly, a valuation process can determine the areas of improvement, driving the company value and places that can reinforce business growth. Moreover, value drivers are the characteristics that significantly impact performance and improve the company’s potential to grow and develop in the future. Thus, an entrepreneur needs to create value before presenting the business to an investor.

The most common value drivers are as follows:

  • Stable cash flow
  • Motivated management team
  • Growth strategy
  • Strategic planning
  • Effective financial controls

An investor is most likely to compare these drivers and weigh the risks with other investment opportunities. Whereas keeping in mind the factors where value is created, such as brand name, technology, market preposition, and products and services, the company sells. A regular business valuation can help companies monitor their value drivers’ health to ensure they are operationally optimal.

Analyze your company

Provided that, business valuations and analysis must be prepared by a qualified professional, which ValueNow offers. One of our skilled professionals will analyze the following:

  • Financial statements of the company
  • Comparable transactions
  • Industry ratios
  • Market size

As a result, entrepreneurs will negotiate with their investors for a suitable investment price that would help improve company performance.

 Reasons to conduct business valuation for your company

  1. We base your company value on an Exit Planning Strategy to boost profitability to increase its value when it closes down. Therefore, this prepares the company for any unexpected changes and prevent financial losses due to a lack of corporate strategy.
  2. If someone is willing to buy your company, it is crucial to check out the market status and potential income and ensure that any concerns are overlooked to make the investment feasible. 
  3. If the entrepreneur wishes to sell the company, especially to a third party, the entrepreneur must ensure they give the company/business precisely what it is worth. 
  4. It is also essential to have a strategic plan that determines company worth and gives a clear direction, overview of goals and objectives and manages your company’s risk profile proficiently. Moreover, strategic planning allows you to measure your success, efficiency and growth over time.

To conclude, valuation is not just about determining what a company is worth in your hands, but instead its transferable value, which determines if the company will run smoothly without the business owner if they leave it permanently. By flagging these “risk” areas, a business valuation process can help a company minimize its risk profile and maximize its potential value.

Ahmad Khalaf
CEO – ValueNow