What Is Business Valuation And Why Is It Important

Business Valuation in the simplest terms can be defined as the economic valuation of a business. However, the humble name shouldn’t be underestimated. It is a complex process that is time-consuming and involves a high degree of sophistication. Several factors are taken into account, from market prospects and the business’ sector to the company’s financial performance over the years. Business Valuation is a complicated and subjective science and required in many circumstances that include taxation, sale value, mergers, and divorce proceedings as well.

 

Why do I need it?

The most obvious question to this answer would be taxation. However, claiming Singapore tax incentives is just one of the few reasons for business evaluation. Whether you are operating a small business or a large company, business valuation gives you a gauge of your business’ financial conditions and helps you change or set up new plans for the future.

Entrepreneurs can’t really do without a business evaluation since it helps to accurately determine the shares and estimate both opportunity costs and contingencies. It also helps you to plan out the company’s course in case of unforeseen events like divorce, death, disaster or disability. Business valuation is also necessary for insurance and planning out the payroll services offered by a startup.

If you want to implement an Employee Stock Ownership Plan for your business or avail a business loan, business evaluation becomes an absolute necessity.

business valuation

 

How is it done?

Depending on your motive, the process of evaluating your business’ economic value varies. If you are looking forward to selling your business you need to look at the happening of the past and the present. However, if you are looking for growth in the future or rake in some investments, the company’s potential in the future is taken into account. The process is a combination of science and art without any “wrong” or “right” way.

So, apart from crunching financial numbers, there are a few things you may want to consider:

  • Factor in the non-financials like goodwill, company reputation, and more
  • Recast financial statements after you have deducted the personal expenses
  • Cross-check different methodologies for your valuation
  • Take the help of professionals to get rid of emotions from the valuation

doing paperwork

 

What are the methods?

Here are a few of the numerous ways your company may be valued:

 

1. Market Capitalization

Probably the simplest form of business evaluation with volatile results. This method involves multiplying the total number of outstanding shares of your company with the share price

 

2. Market Approach

This is usually implemented by small businesses where a business is compared with recent sales and other financial figures of similar businesses in the market

 

3. Discounted Cash Flow (DCF)

Future cash flow projections are taken into account to figure out the company’s current market value. This method is usually implemented to make rough estimates of a company’s attractiveness as an investment opportunity. It is useful for growing businesses and startups.

 

4. Earnings Multiplier

Earnings multiplier is a bit similar to the DCF method. In this case, future profits are adjusted against the current cash flow that can be invested over a certain period of time with the current rate of interest. Basically, Profit and Earning Ratio is adjusted with current interest rates taken into account.

 

In a Nutshell

Business Evaluation is something that can’t be assessed easily and requires the help of professionals who have experience in the field. When you opt to get your business valuation done, you should consider all the factors mentioned above and carefully consider the evaluation methods implemented by the individual or company offering its services. You should also check out their track record from the past and benefits to customers from their previous analysis.

For more information, feel free to get in touch with us.