Top 10 Situations Where Business Valuation is Needed

by  Adv. Abhijeet Sawant  

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Knowing Your Worth: Top 10 Situations When You Need a Business Valuation

Business valuation is knowing what is the worth of the business. When one understands what is exactly business valuation and how it can be used it will in turn help the company make better decisions regarding finance, investing, and many more. This blog provides what is business valuation, the methods involved in it and what are the situations when one business requires business valuation.

What is Business Valuation?

It is a technique involving several steps that are used to know what is the worth of a business, often used by investors or individuals related to the business in some form, and take any further decisions accordingly. It is a process of getting to know what is the economic value of a business. This process involves analyzation of all the units of the business to know the total worth and worth of all the units individually as well.

The method encompasses the utilization of all measures and thus evaluating all the components of the business to know the actual worth. All the methodologies and factors are put into consideration to know an estimated value of the business in the market and take into consideration the economic factors as well. It looks into all types of assets and liabilities before reaching to conclusion for the value. It is a complex process requiring in-depth analysis of all the concerned factors focusing on both qualitative and quantitative factors of the economy and then in total estimating the value for one to sell the business or for any other purpose

People also read: All about Process of Business Valuation

Methods of  Business Valuation

There are various methods of business valuation one may choose according to the nature of the business, the type of industry, and what decision is to be taken. In some situations one approach may be used or a combination of different approaches be used to get a rough estimate of the business valuation. Some of these are: –

  1. Market Capitalization

It is one of the simplest methods. In this method, the company’s price share is multiplied by the total number of shares of the company. The value in turn we get from the multiplication is what is the value of the business.

  1. Times Revenue Method

In this method, the revenues which are generated by the business in a certain period are applied to a multiplier, thus getting the business valuation. This multiplier is decided upon considerations of the industry, economic environment, and market structure.

  1. Earnings Multiplier

This is considered the most accurate method of getting a business valuation. In this, the earnings multiplier gives an accurate value of what could be the company’s real value. The earnings multiplier tells the company’s profit which in turn is an indication of the financial status of the company. It is better to know the financial success than the sales revenue for evaluating the business. The earning multiplier provides for the current P/E ratio as it tries to adjust future profits against the cash flow.

  1. Discounted Cash Flow (DCF) Method

It is the method that uses the cash flows that are to be generated in the future. These are used accordingly in adjustment to know the value of the company. This method also takes into consideration inflation as well to get accurate business valuation. 

  1. Book Value

In this method, the value of the shareholder’s equity is shown on the balance sheet of the business. The book value is derived through the subtraction of liabilities from the total assets. 

  1. Liquidation Value

In this method, the business valuation is done through net cash that is available to a business in case the assets were sold and the liabilities were paid off. 

  1. Precedent transactions

In this method, the transactions that have happened earlier in the same industry are taken into account for business valuation. For ex if a company is sold some time back then the business be valued as per the sale provided that both the businesses are from a similar industry. 

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How to carry out a successful valuation of a company

If a company is carrying out a valuation of the company, they would want it to be successful. One can consider various factors that the estimated value is the same as the actual value or close to the value. These factors are:

  • Objective

One does not need to hear opinions when getting a business valuation. An opinion can influence in a negative manner, better to ignore it. 

  • Holistic

During business valuation, one should not only consider the assets, cash flows, and liabilities but also should take into factor but also other factors like the economy, environment, and market factors, and various internal and external factors. 

  • Simplistic

The valuation should be simple, it should not include the factors of future projection that won’t have any significant effect in the future. 

  • Justifiable

The valuation should be done on the information available, anyone reading should be able to get the same conclusion. It should be justified in all ways. 

People also read: Confused Between Valuation and Market Price? Get everything Answered

Benefits Of Business Valuation

The following are a few benefits of business valuation: –

1. To Know Your Business

One of the benefits of business valuation that it helps in knowing the business, understanding it, and getting to know what is the performance of the business. It helps in knowing the financial value thus helping in making decisions for the growth of the business. It calculates all the operational measures thus in turn getting to know are pros and cons of the company. It helps in knowing the actual performance of the company understanding what are the trends and steps to follow for the future and planning the strategies in accordance.

2. Employee Benefits

Another benefit of the business valuation is that when a business is being valued it helps in what could be a bonus plan for the employees which in turn helps in the retainment of the employees and attract employees who have potential to join the business.  it helps in knowing what plans a business can accommodate accordingly for the employees like ESOP, stock option plans, phantom stock plans, etc.

3. Financing

When one business wants to take a loan from a bank or any financial institution, it would like to see the business valuation before making any decision. This would in turn provide the banks with a fair market value of the business, thus aiding in making a decision. The banks also look into the financial capability, existing loans and what are the sources of generating finances and they have to make sure that they would get the loan returned to them on a timely basis. 

4. Taxation

The business valuation determination would help the businesses to know what would be their taxes due. This would help them in planning their taxes and try to find ways that would help them avoid paying taxes in the future.

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Top 10 situations where business valuation is needed

There are various situations in which one needs to determine the business valuation, some of these are: –

1. Sale of the business

If one plans to sell the business, then one needs to do a business valuation to know what price one would get for the business. Thus, one can work accordingly to improve the value for better sales.

2. Mergers and Acquisition

In the case of Merger or Acquisition one needs to be well prepared with business valuation. One should know the actual price so that he gets a fair price against the sale of the company, which would allow him to buy or sell without suffering from any kind of losses.

3. Buy/ Sell agreements

When one company signs an agreement for buying or selling, one needs to know what is the actual value of the business. This value is usually mutually agreed upon through the agreement between both parties.

4. Dissolution

In case one partner or more partners wish to dissolve the business, thus it would be dissolved. Thus, for dissolution, one wants the transactions and division to be fair thus knowing the business valuation is important.

5. Succession

In case one wants to pass down the business to a successor or gift someone, it’s kind of necessary to know the full worth of the business.

6. Marital Issues

In case a couple is getting a divorce and the husband has to give the company or its share to his wife for alimony, one would require to know the actual and fair value of the business.  In case a business is run by a married couple, after the separation the business will be divided as per the agreements, the liabilities and assets will be divided thus knowing their actual value is important.

7. Funding

If an investor is investing in a company, he would really like to know what the actual value of the business, they would like to know what return their investment would yield to them. 

8. ESOP determination

ESOP is an Employee Stock Ownership Plan is an employee benefit plan. The companies use this plan to encourage the employees to work better by giving them ownership of the companies. In order to do so one company needs to their business valuation.

9. Strategic Planning

A business may conduct business valuation for strategic planning for the business, identifying the issues, and getting the solutions for the same. It also helps in improvement, goals for the future, and planning to achieve the set goals.

10. Litigation

A company can be involved in a legal dispute which would thus require them to have their business valuation as required by the court for the proceedings. 

People also read: Know all about Property Valuation for Insurance

Additional Factors that Influence Business Valuation

Apart from the various factors enlisted for business valuation, other additional factors can also influence the valuation, these are apart from the financial factors. Some of these are:-

  • There is a need to understand what is the source of purchasing shares either through external or internal factors.
  • The shares are being purchased by whom, the existing shareholders or the company or new shareholders are investing.
  • One should also try to get familiar with the existing agreements related to loans and if there are any conditions related to payments in any form.
  • Another factor to consider is what are the other sources available to raise money.
  • One should also consider the insurance policies before valuation in order to have a more accurate value.

Our comprehensive business valuations consider all relevant factors, providing a clear and objective assessment of your company's value. This empowers you to maximize value during transactions, attract investors, and minimize risk.

Conclusion

Business valuation is knowing what is the worth of the business. It is a process of getting to know what is the economic value of a business. This process involves analyzing all the business units to know the total worth and worth of all the units individually. There are various approaches to business valuation, and one may choose according to the nature of the business, the type of industry, and the decision to be taken. These are the asset approach, income approach, and market approach. Business valuation can be done for various reasons like buying, selling, dissolution, marital issues and many more. 

Frequently Asked Questions

Q1. What is Business Valuation?

Ans1. Business Valuation is a technique involving several steps that are used to know the worth of a business, often used by investors or individuals related to the business in some form, and take any further decisions accordingly. It is a process of getting to know what is the economic value of a business.

Q2. What are the Approaches to Business Valuation?

Ans2. There are various approaches to business valuation, and one may choose according to the nature of the business, the type of industry, and the decision to be taken. These are asset approach, income approach, and market approach. 

Q3.When might a business valuation be important? 

Ans3.  Business valuation might be important in cases where an owner wants to know about the business, wants to sell it, or tries to be a part of the merger. It can also be done for financing or taxation purposes. 

Q4. What are the reasons for business valuation?Ans4. There are various situations where business valuation is needed for buying, selling, dissolution, success, marital issues, funding for investments, ESOP, strategic planning, and many more.

Market fluctuations can impact your company's value. Our streamlined process delivers fast and accurate reports, allowing you to capitalize on fleeting opportunities and make timely decisions. Get started on your business valuation report today!

Adv. Abhijeet Sawant

Adv. Abhijeet Sawant

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Abhijeet Sawant is an advocate who has been offering ethical and professional legal consultancy and advisory services with a focus on achieving desired outcomes. With 7 years of independent practice, He possesses significant expertise in handling legal cases. Abhijeet completed his degree from the University of Mumbai and has been practising law independently ever since.

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