Business Valuation: Determining What A Company is Worth
A business valuation is the process ofdetermining how much a particular company is worth. Many financial analysts believe most businesses should have a business valuation performed regularly because this information can help some businesses identify their strong and weak points. Through a business valuation, business owners learn what factors are holding them back and what areas could help them grow short and long-term profitability.
Any business owner looking to sell his company, as well as those looking to buy businesses, will need business valuations. Business owners will need to know the true worth of their business if they are:
- bringing on another partner
- estate planning
- making stock available to the public
- merging with another company
- paying taxes
- planning on retiring (or turning over charge of the company to a successor)
- taking out a loan.
Smart business owners who want to prepare for unforeseen events, such as divorce, death or illness, may also want to get business valuations. In these circumstances, having an accurate business valuation will help protect the owners or the heirs of the business.
How the Value of a Business is Determined
Many company owners hire expert business appraisers to evaluate the worth of their businesses. Some of the factors that business appraisers consider when estimating the value of a business include:
- brand loyalty
- economic conditions
- industry comparisons
- name recognition
- technology advancements
- the company’s past and present performances
- the company's size
- the property the business owns.
The Pros and Cons of Business Valuation
Business valuation can be very complicated and expensive. Many companies offer the services of certified experts who know and understand these intricate and sometimes confusing factors. The people who are hired to do a business valuation are called appraisers. An appraiser can be found in a number of places, including:
A trained appraiser will identify all the tangible and intangible assets a company owns and can offer. However, because business valuations involve intricate processes and complex calculations, they tend to cost thousands of dollars.
Keep in mind, however, that regardless of the size of your business, valuations are helpful in gauging its profitability and weaknesses.
Business Valuation Calculator
As an alternative to hiring an appraiser, some business valuation companies may offer a business valuation calculator on their Web sites. These calculators are quick and sometimes free ways of getting a rough estimate of the value of your business.
Computer software, available starting at around $400, is another way to get a quick estimate of the value of your business. With business valuation software, business owners can enter their cash flow information, costs, growth rates and other information to get an approximate value for their company.
However, while business valuation calculators can provide estimates, they are by no means a reliable figure for making official transactions. Business owners who want a realistic valuation of their companies will eventually need to hire a trained appraiser.
Resources
Fast Business Valuations Staff (n.d.)
A free small business valuation service calculator. Retrieved September 1, 2009, from the Fast Business Valuations Web site:
http://www.fastbusinessvaluations.com/.
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