Published on April 11th, 2014 | by Alice Aires0
How A Business Valuation Actually Works
Ever wonder what the actual process of a business valuation is? Well, while it is pretty complicated, it can be explained pretty easily. There are plenty of reasons why a business would need to get valuated, but before you get it, it is great to understand the process so you know how the valuators came up with the reports and figures that they provide in the end. So let’s just take a quick view at what goes into a valuator’s job.
Getting & Organizing All Of The Company’s Data
This might be a bit obvious, but the first thing that they have to do is gather all of your information. When I say all, I mean it! They not only ask for your financial records and other company related paperwork, but they even get into details of how the business works. They ask things that are all about your daily operations and processes, all of your competition research, marketing campaign details, things the company might do in the foreseeable future, and plenty more. So be prepared to give all of the information as you can to the valuator. They use all of this information to help give you a more accurate report.
Once they have all of the data they need, they then go over everything in detail. They will also most likely do their own independent research on your competitors so they can compare your business to theirs. They also check the current values of similar companies and will use those figure to help come out with an overall value of your company. This is a part of the valuation that takes a lot of time and work, but in the end will give them a much better idea of where your business is and what potential it has for the future.
Use A Valuation Approach
The three main approaches that valuators use are the market approach, the income approach, and the asset & cost approach. There are other approaches out there, but these 3 are the most used and most effective. They each take a look at different aspects of your company to come up with the best estimate of value as possible. These approaches get into detail, so going over each single one would make this article extremely long, but once a valuator finds the best ways to value your company, they will come up with a figure or even multiple figures based off of each approach.
Now, the valuator is finally done most of the work, they just need to come up with the reports… which contains a large amount of information. From the value of your company, down to the details of what areas your company might need to improve. It is a really big help to have all of this information as a business owner and can be used so many different ways.You might even find out things about your company that you never even thought of!
Ways To Use The Information You Get From The Reports
Most people associate a valuation to the sale of a company, which is correct, but it can be used for many other things. You can track your goals, figure out your spending patterns, prove your business’s credibility to creditors, finding areas in your company that need help, and plenty more. Getting an evaluation should happen at least once a year, if not more, to ensure that you are staying on top of your business and managing it properly. Don’t let your business go downhill because you were unaware of what was happening.
Knowing what the valuator has to do is important because it makes you realize that you need to find an experienced valuator to ensure that they are as accurate as possible. It doesn’t matter what the reason you are getting it done for, misinformation will always lead to something bad happening. Either you are unaware of your business’s true value, you sell the company for too low, or anything else that could happen. So don’t just get anyone you come across, find a good valuator that will understand what it is going to take to give you proper reports.