Business Valuation - Everything That a Business Owner Must Know While Making business decisions

1
Business Valuation - Everything That a Business
Owner Must Know While Making business decisions
2

• Business owners essentially need to know the fair
  value of their company.
• This information is critical while planning to
  sell a company, designing an exit strategy,
  bequeathing the business to the owners kin,
  pursuing new partnerships, merging with another
  company, or managing ESOPs.
• These are just a few reasons to conduct business
  valuation.
• Business valuation is part math, part research,
  and some may even say part highly educated guess!
  
• Several methods can be used for conducting
  business valuation.

3

• Ideally, accredited experts are hired to perform
  this exercise, as professional judgement is
  needed to
• Predict a companys financial performance
• Value proprietary technology or specialized
  knowledge possessed by a business
• Determine the potential for success vis-à-vis
  changing economic conditions.

4

• The three main approaches toward business
  valuation are
• Asset-based approach
• Through this approach, the business is valued by
  finding the difference between assets and liabilit
  ies.
• Income-based approach
• In this approach, the value of the business is
  estimated to be equal to the current value of the
  economic income that is expected to be generated.
  This approach discounts or capitalizes expected
  returns at a rate of return that reflects
  investor risks and hazards. 
• Market-based approach
• The fundamental basis of this approach is that
  the fair market value of a company can be
  determined based on the prices paid by investors
  for stocks of similar, publicly traded (or
  private) companies. 

5

• Business valuation helps business owners take
  informed business decisions and design strategic
  plans. The process has many benefits including
• Knowledge of company assets
• The business owner gets information regarding the
  exact value of the companys assets and does not
  need to depend on estimates.
• Business valuation helps in taking decisions
  regarding insurance coverage, required amount of
  investment, etc.
• Resale value
• Business valuation showcases the true market
  value of the company.
• If the owner is contemplating to sell the
  company, then this process is necessary, as it
  gives the owner bargaining power.

6

• True company value
• Business valuation not only considers simple data
  points, such as stock market value or profit
  numbers, but also takes into account historical
  data and income and valuation growth outlook.
• Therefore, business valuation reflects the true
  value of the company.
• Access to new investors Business valuation can
  help business owners seek new investors.
• Potential investors would always insist on a
  business valuation report to understand the
  companys prospects.

7

• Conclusion
• Business valuation also helps in setting
  long-term plans of the company. Valuations done
  previously can be used as benchmarks, based on
  which the company can strategize its growth
  plans.
• Business valuation is a critical process that
  helps a business owner understand various
  components of a business, and hence, it is
  invaluable to the owner.