Business valuation: Concepts and goals of the procedure

Grabbing new opportunities and earning more profits with each passing year is one of the most indispensable goals of a business. At the same time, every business is considered a means of getting good returns. By investing money in it, the owners of the business expect to obtain a tenfold increase in its value at the time of sale.

But how can one determine a company’s true worth? Professional appraisers have given an answer to this query.

The business valuation service has reached the peak of popularity in recent years. Let’s take a closer look at what tasks can be solved by those who evaluate a business on their initiative, and how the mechanism of this process works.

Modern enterprises have complex structures. In addition to tangible assets that have a very specific value (buildings, equipment, vehicles, special equipment, stocks, construction in progress, land, etc.), there are intangible assets. For example, copyrights, registered trademarks, technology patents, licenses, and goodwill of the company.

Each unit of assets contributes to the development of the business, therefore, approaches to assessing the value of a business should be comprehensive.

A competent expert calculates what seems impossible to calculate. Analytics is complemented by specific financial and economic indicators derived from mathematical formulas. As a result, the desired and, what is extremely important, the objective value appears.

Not so long ago, business owners or management carried out business valuation only in cases where it was (and still is) a mandatory requirement. For example:

• in transactions involving govt., regional or municipal property;
• in case of disputes about the value of the object of assessment (tax, mortgage);
• when selling a company or its merger, acquisition, liquidation, and other types of restructuring;
• in case of repurchase of shares (property) from shareholders

However, this obligation was gradually replaced by “goodwill”. There has been a growing awareness in the business community that it is impossible to develop a company without understanding how much it is worth in the market.

The financial valuation of a business has tangible benefits, regardless of the scope of the enterprise, size, form of ownership, and duration of its presence on the market. Knowing the real value of assets, management can make effective decisions. In particular:

• improve organization management methods, focusing on the market industry;
• develop correct business plans based on actual, not conjectural indicators;
• competently carry out reorganization, strengthen “weak links”;
• invest in sound investment projects;
• conduct purchase and sale transactions taking into account real prices;
• assess the creditworthiness of the company and the potential for using the property as collateral.

The decisions that will be made as a result of the assessment are sometimes unexpected and radical. Having discovered that several objects on the company’s balance sheet are inefficient or redundant, the manager can get rid of them.

For example, switch to the use of rented warehouses or outsourcing if it is more profitable than maintaining your buildings and facilities and paying employees during the off-season for downtime.

Having received a report on the real value of assets, an entrepreneur can take a firm to a well-founded position and demand from the bank those credit conditions that correspond to the state of the enterprise, if we are talking about a loan secured by the property.

This content is meant for information only and should not be considered as an advice or legal opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.