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In essence, the set of procedures and processes that are used in order to assess the economic value of a particular business is called business valuation.
While unfortunate to note, only a few business owners possess a realistic idea in terms of their company’s true economic worth.
However, this premise is actually not surprising.
Research show that people (including business owners) have the tendency to place a much higher value to things that are theirs compared to those that belong to others.
Fortunately, this is where business valuation can prove helpful.
Why is business valuation important?
The importance of business valuation cannot be overstated.
While there are many reasons business valuation is considered a must, below are some of the primary ones:
- It gives business owners a clear insight as far as the company’s worth goes.
Fact: many entrepreneurs do not have an accurate idea what their business is actually worth.
Those who assume might be in for a surprise.
If truth be told, an unbiased, accurate, and independent opinion can only be given by a business valuation expert.
Getting the services of one should be considered money spent well.
- It will give business owners a better picture of the current financial standing of the business.
While it’s unfortunate to note, many business owners are guilty of thinking they fully grasp the financial situation of their business.
However, it pays to remember that when it comes to business, making the wrong business assumptions can sometimes be very costly.
To play safe, consider it a must to invest in the services of a business valuation professional as they are the only ones who can provide an independent review and analysis of the true financial standing of a business.
- It helps business owners stay updated and relevant.
Undoubtedly, the business world is not only very dynamic but also highly volatile.
Thankfully, routine business valuations can help update business owners on the latest changes in the business world as the company, economy, and the industry will be evolving continuously.
- It will give business owners a better understanding of the company’s place in the total business landscape.
While unknown to many, business valuations can also provide business owners with a clearer idea of the current competitive landscape of the industry they are a part of.
In other words, they will get relevant information such as market price of companies that are publicly traded and are in the same line of business.
- It will give business owners the luxury to make faster decisions when buying, selling, or doing mergers.
When considering selling, buying, or securing business funding, a business valuation can help owners decide easily and take advantage of truly lucrative business opportunities.
What are some of the approaches used in business valuation?
Asset Approach
This kind of approach will take into account not just the asset but also the liabilities of the business.
This is done so an accurate and clear picture of the company’s value is achieved.
While it may sound pretty straightforward, it is not exactly as simple as it seems.
If truth be told, this kind of approach can be tricky.
The challenge is often attributed to the details—the assets and liabilities that should be included, picking the standard to use when determining value, and identifying the value of each, among other things.
Market Approach
As the name implies, market approach will be based on market signs when determining the value of the business.
That means the worth of other businesses similar to the one you are involved in will be taken into account.
Obviously, those who would like to buy a particular business would like to know the “going rate” for that type of venture before splurging.
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