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5 Critical Elements in your Business Valuation

5 Critical Elements in your Business Valuation

Dr Thommie Burger is the Founder of JTB Consulting
Your Business Valuation and 5 Critical Elements to Value a Company

When considering the sale or purchase of a business, potential buyers and sellers may wonder what the business is worth, i.e., the Business Valuation.

In such transactions, it is common for one party to pay cash and another party to accept equity in the business. However, without a third-party valuation, both parties may not know if they are getting fair value in the deal. A fair valuation will help you negotiate a fair price and avoid nasty surprises after completion.

Unfortunately, many business owners underestimate the importance of this process and pay the price later. A bad business valuation can be extremely costly – it could lead to you selling your company for less than it’s worth or buying another business at a cost that leaves no room for future growth. A survey by consultancy firm BEND revealed that 47% of businesses bought or sold in the last two years suffered from inaccurate valuations. Don’t be one of them! Read on to discover why a business valuation is so important when selling or buying a company…

The valuation of your business may be one of the biggest decisions of your life

A business valuation is one of the biggest decisions you may ever make. When you buy or sell a business, you are not just buying or selling a company’s assets. You are also buying or selling the employees and their skill sets. You are buying or selling the customers and their relationships. You are buying or selling the goodwill of the business. All of these factors will be included in the valuation. For those who want to sell their business, a valuation will help find a buyer willing to pay a fair price for the business. For those who want to buy a business, a valuation can help find a seller willing to sell at a fair price.

Avoid unpleasant surprises

A business valuation is a snapshot of where your company is at the time of the analysis. It provides a current estimated value of your company. Because the business value will be based on several factors, including the current state of the economy, it can help you avoid unpleasant surprises. If you buy a business, you will know what you will pay for it. You will know what your business is worth if you sell a business.

Buying or Selling a Business? Contact our Business Valuation and Modelling Team Today.

Help you negotiate a fair price

The valuation process provides a third-party opinion about the value of your business. The Business Valuation Specialist will look at your company from the outside and conclude the company’s strengths and weaknesses. A business valuation will also provide a range of values based on several scenarios. For example, the valuation may determine that your company is worth R10 million under a worst-case scenario (lowest projected profit) and R13 million under a best-case scenario (highest projected profit).

Determine if your company is worth more dead or alive

There are many different exit strategies when selling a business. One of those will be to sell your company “as is,” and another option would be to sell your company “with modifications.” The difference between these two options is whether your company will remain the same after the sale or whether your company will be a completely new entity with new employees, a new brand, and/or a new product or service.

A valuation can help determine if your company is worth more dead or alive. If your company’s value is higher if it is sold as a “dead company,” it makes sense to sell it as a dead company. If your company’s value is higher if it is sold as an “alive company” with existing employees, customers, and products, it makes sense to sell it as an alive company.

More Insights: Business Valuations 101: What’s Your Company Worth?

Knowing your company’s value will help you make the right decision for your company and its employees

A business valuation can help you see your company’s strengths and weaknesses. The valuation will also show you your company’s potential value. Once you have this information, you will be better equipped to make a decision that benefits the company and its employees.

Small business owners have invested a considerable amount of their own money into building their dreams. A business valuation will provide a business owner with multiple facts and figures regarding the actual worth or value of the company in terms of market competition, asset values, and income value. In taking the active decision to begin understanding their value, an owner can witness the growth that occurred thus far and provide themselves with a road map to deliberate decision-making.

Here are five benefits of getting a business valuation:

Business Valuation Benefit 1: Access To More Investors

When it comes time to reach out to additional investors to fund company growth, a business valuation report is commonly a prerequisite. Investors want to see an active layout in terms of current value and a comprehensive value projection. Suppose Investors can comprehensively see where their money is going and how it will give them a smart return on investment.

In that case, they are more likely to consider a proposal seriously. An intimate understanding of one’s current business valuation will allow a business owner to assess where the most value will come from. This will give them an edge to spark the interest of potential investors and carry their company to the next level.

Business Valuation Benefit 2: Smart Decision-Making to Enhance your Business Value

A valuation at its fundamental level will highlight what makes a business valuable. Knowing the factors that most positively impact performance will provide business owners with an informed look at how they can work to increase their overall value.

Business Valuation Benefit 3: Sales Value

While selling one’s business is usually a once-in-a-lifetime event, keeping it in mind as early as inception is important. A business owner may pour many years, even decades, into their business so when it comes time to pass it on, they should receive the best “bang for their buck.” The valuation process begins long before one’s business is on the market.

Prior knowledge of one’s business valuation provides the owner the strategic time to invest in what will most positively affect the growth of a company’s value to achieve a higher selling price.  Business valuations can help keep a business on track and inform the best overall exit strategy.

Business Valuation Benefit 4: Understand where your Business Fits in the Industry

A business valuation will describe precisely where one’s business fits into the overall industrial sector. Using intuitive public data points, a valuation will draw upon previous market value prices or the sale of similar company types recently sold or publicly traded. This will allow business owners to see where their progress lies on a national scale and, in turn, provide them with the opportunity to strategise how best to invest their financial portfolio to grow their business.

Business Valuation Benefit 5: Obtain a True Company Value

A business owner will commonly have a general idea of what their business might be worth based upon simple financial portfolio factors (i.e. total asset value, company bank account balances, etc.). However, while important, these factors can never paint the full picture of the overall value of one’s business. A business valuation draws upon a multitude of factors, each individually affecting the growth or decline of value. It also helps to show company income and valuation data over time.  Knowing the true value of one’s business can often decide whether a sale is the best possible option for the owner.

In Case You Missed It:

Financial Model Design and 9 Fundamentals You Must Never Forget.

Established in 2006, we have successfully written hundreds of bankable and world-class Business Plans for clients across 25 countries. As South Africa’s Leading Business Plan Company, we are confident that we would be able to assist you too. Kindly note that we also offer “Investor Pitch Decks”, “Excel-based Financial Models”, and “Proposal/Tender Writing Services” in addition to our Custom Business Plan Writing Service. Please visit our Services page for more information.

We look forward to being of service to you. Please feel free to contact our Founder, Dr Thommie Burger, on +27 79 300 8984 should you have any questions. He is also available via email and LinkedIn.

JTB – Your Business Planning Partner.

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