Why Business Valuation is Significant

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Why Business Valuation is Significant

CFO Tech Outlook | Monday, March 29, 2021

Business valuation is essential for companies as it serves as a reality check for the owners with a biased or uninformed viewpoint on what their business is worth.


FREMONT, CA  : Business owners invest a lot of time and money to maximize their organization's value by implementing development strategies with specific objectives. These strategies are meant to increase value over time but reaching those targets can be challenging if they don't know where to start.

Owners must consider how much their company is worth today and what supports and drives that value. This phase is often ignored or downplayed, or at the very least, based on incomplete data or speculation, due to owner overconfidence or apathy. In this situation, a valuation typically acts as a reality check for business owners who have a misguided or incorrect understanding of what their company is worth.

What is the importance of business valuation? 

The standard response is that valuations are necessary to settle tax or legal matters. However, valuations are carried out for several purposes, including but not restricted to the sale or purchase of a company. Valuations are required in the event of death, injury, disaster, or divorce to evenly evaluate the business assets according to terms laid out in legal filings.

Valuations are often necessary while gifting or donating company stock as part of a charitable contribution, settling IRS or shareholder disputes, or converting a C-corporation to an S-corporation. A business valuation may be necessary by a buy/sell agreement, a partnership agreement, or a shareholder agreement.

Additionally, when collecting strategic capital or securing a Small Business Association (SBA) loan, owners will conduct a valuation. An initial and annual valuation will be necessary when introducing an Employee Stock Ownership Plan (ESOP).

How does the business valuation process work? 

Valuing assessment is a type of art and science. Business valuation is a procedure and set of techniques used to measure the economic value of an owner's interest in a business. An accurate assessment of a closely owned business is a vital tool for a business owner to evaluate both opportunities and expenses as they prepare for potential growth and eventual change. It can be used to determine an owner's relative value at a specific point in time, or it can be used to understand the price at which a buyer will be willing to purchase the company.

What are the critical considerations for a business valuation?

The purpose and goal of the valuation will be considered first by the business valuation expert. They'll then examine the company's nature and history, its products and services, the industry's life cycle, and the economic and political setting. Then there are unique aspects to consider, such as client relationships, executive compensation, surplus assets, and working capital.

Goodwill or other intangible assets, reliance on an owner or key employee(s), diversity of the consumer base, market position, and the industry's competitive environment are all factors that may have a significant impact on value.

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