There are numerous occasions that require the business owner to have an accurate estimation of their business’ value. Most obvious situation would be when a person is planning to sell a business – or wants to acquire one. The value of a company affects directly the buyer’s willingness to pay.
Naturally, the investors also want to know what the business is worth before becoming a partner. An accurate number is needed also in the case of shareholder buyout, when a partner exits. The owner also needs to know the value of the company when issuing shares and communicating the share price to shareholders. Valuation is also necessary when a successor takes on after the older generation.
Not only is business valuation useful when making changes in ownership or capital structure, but also when a deeper understanding of the value and potential of the business is needed. Many of the calculations done to evaluate the value of a business are also important in predicting the future of the company and estimating its financial health. Regular valuations are a good way to demonstrate the growth of a business for stakeholders or even employees, who will stay motivated to keep up the good work.
And if things do not go as planned, the business needs to be valued in the case of bankruptcy. There are also legal disputes in which a company valuation is necessary, such as divorce, or inheritance and gift taxation situations.
In these scenarios, it is vital to have a reliable estimate of the company’s value that is not affected by the interests of the person conducting the evaluation. As there are endless evaluation criteria, some results can be biased to the owner’s disadvantage. In such situations, the business owner needs to have a competing evaluation to offer, for example, to banks or buyers, which can be used to support the owner’s views in negotiations and discussions.