FAQ on Business Valuation
Business valuation is an economic process, which is being used to determine the financial value associated with a business. This figure will help you to determine the amount that people are willing to pay or receive in order to invest in the business.
There are multiple methods to do business valuation. The asset-based business valuation approach holds a prominent place out of them. This is where the assets of a business are taken into consideration in order to determine the value of it. In here, both assets and liabilities of the business will be taken into consideration.
Another popular approach used for business valuation is earning value approach. This is where the return on investment of a business is taken into consideration to determine its overall value. During the valuation process, special attention is paid towards discounted future earnings and capitalizing past earnings.
Some businesses go through market value approach for business valuation. This is where a business is valuated in comparison to another business of the same scale.
If you are planning to sell your business or if you are planning to obtain a loan by using your business as collateral, you will come across the need to do a business valuation. However, there are some other reasons on why you should do a business valuation. For example, you may think about doing a business valuation when you plan for retirement, when you want to figure out unforeseen health conditions, or for internal use, such as to benefit internal employees who wish to purchase shares of the business. You may also do a business valuation for litigation purpose.
Before a business valuation, there are certain things that you can do to enhance the overall value of your business. For example, you may diversify customer portfolio, use safe methods to store sensitive data, and have solid processes in place. When you start from these basics, you can continue to increase the value of your business along with time.
There are two different premises to be mindful about. They include value in liquidation and value as a going concern. At the time of valuating a business, the most appropriate method is selected depending on best use and highest use of the business.
When you are valuating a business based on the asset-based approach, you will come across the need to figure out the differences that exist in between tangible assets and intangible assets. Tangible assets are the physical assets of a business. These assets are directly adding value to a business. Such assets include real estate, land, inventory, machinery, securities, equipment, cars, trucks, furniture, cash, and securities. On the other hand, intangible assets refer to the assets that are not possible to be touched or exist in the physical world. They include industry experience, positive reputation, value of customers that belong to a business, patents, and copyrights. At the time of valuating a business, it is essential to pay attention to both tangible assets and intangible assets.
Yes, it is important to do a business valuation, even if you are passing down a business to a child. In all instances where there is an involvement of a potential gift tax, you will need to do a valuation.