When considering the sale or purchase of a business, potential buyers and sellers may wonder what the business is worth, i.e., what is the Valuation of this business.

In such transactions, it is common for one party to pay cash and another party to accept equity in the business. However, without a third-party valuation, both parties may not know if they are getting fair value in the deal. A fair valuation will help you negotiate a fair price and avoid nasty surprises after completion. Unfortunately, many business owners underestimate the importance of this process and pay the price later. A bad business valuation can be extremely costly – it could lead to you selling your company for less than it’s worth, or buying another business at a cost that leaves no room for future growth. A recent survey by consultancy firm BEND revealed that 47% of businesses that were bought or sold in the last two years suffered from inaccurate valuations. Don’t be one of them! Read on to find out why a business valuation is so important when selling or buying a company…

The valuation of your business may be one of the biggest decisions of your life

A business valuation is one of the biggest decisions you may ever make in your life. When you buy or sell a business, you are not just buying or selling a company’s assets. You are also buying or selling the employees and their skill sets. You are buying or selling the customers and their relationships. You are buying or selling the goodwill of the business. All of these factors will be included in the valuation. For those who want to sell their business, a valuation will help find a buyer who is willing to pay a fair price for the business. For those who want to buy a business, a valuation can help find a seller who is willing to sell at a fair price.

Avoid unpleasant surprises

A business valuation is a snapshot of where your company is at the time of the analysis. It provides a current estimated value of your company. Because the business value will be based on a number of factors, including the current state of the economy, it can help you avoid unpleasant surprises. If you are buying a business, you will know what you will be paying for it. If you are selling a business, you will know what your business is worth.

Help you negotiate a fair price

The valuation process provides a third-party opinion about the value of your business. The Business Valuation Specialist will look at your company from the outside and draw conclusions about the company’s strengths and weaknesses. A business valuation will also provide a range of values based on several different scenarios. For example, the valuation may determine that your company is worth R10 million under a worst-case scenario (lowest projected profit) and R13 million under a best-case scenario (highest projected profit).

Determine if your company is worth more dead or alive

There are many different exit strategies when selling a business. One of those will be to sell your company “as is” and another option would be to sell your company “with modifications.” The difference between these two options is whether your company will remain the same after the sale or whether your company will be a completely new entity with new employees, a new brand, and/or a new product or service. A valuation can help you determine if your company is worth more dead or alive. If your company’s value is higher if it is sold as a “dead company,” then it makes sense to sell your company as a dead company. If your company’s value is higher if it is sold as an “alive company” with existing employees, customers, and products, then it makes sense to sell your company as an alive company.

Knowing your company’s value will help you make the right decision for your company and its employees

A business valuation can help you see your company’s strengths and weaknesses. The valuation will also show you your company’s potential value. Once you have this information, you will be better equipped to make a decision that benefits both the company and its employees.

Small business owners have invested a considerable amount of their own money into building their dreams. A business valuation will provide a business owner with multiple facts and figures regarding the actual worth or value of the company in terms of market competition, asset values, and income value. In taking the active decision to begin understanding their value, an owner can witness not only the growth that occurred thus far, but provide themselves with a road map to deliberate decision making. Here are 5 benefits of getting a business valuation:

1. Access To More Investors

When it comes time to reach out to additional investors to fund company growth, a business valuation report is commonly a prerequisite. Investors want to see an active layout, not only in terms of current value but a comprehensive value projection. If Investors can comprehensively see where their money is going and how it will provide them with a smart return on investment, they are more likely to seriously consider a proposal. Having an intimate understanding of one’s current business valuation will allow a business owner to assess where the most value will come from. This will give them an edge to spark the interest of potential investors and carry their company to the next level.

2. Smart Decision-Making To Enhance Your Business Value

A valuation at its fundamental level will highlight what makes a business valuable. Having a knowledge of the factors that most positively impact performance, will provide business owners with an informed look at how they can work to increase their overall value.

3. Sale Value

While the sale of one’s business is usually a once-in-a-lifetime event, it is important to keep it in mind as early as inception. A business owner may pour many years, even decades, into their business so when it comes time to pass it on, they should be receiving the best “bang for their buck.” The valuation process begins long before one’s business is put on the market. Prior knowledge of one’s business valuation provides the owner the strategic time to invest in what will most positively affect the growth of a company’s value to achieve a higher selling price.  Business valuations can help keep a business on track and in turn, inform the best overall exit strategy.

4. Understand Where Your Business Fits in the Industry

A business valuation will describe, precisely, where one’s business fits into the overall industrial sector. Using intuitive public data points, a valuation will draw upon previous market value prices or the sale of similar company types recently sold or publicly traded. This will allow a business owner to see where their progress lies on a national scale and in turn, provide them with the opportunity to strategise how best to invest their financial portfolio to grow their business.

5. Obtain A True Company Value

A business owner will commonly have a general idea of what their business might be worth based upon simple financial portfolio factors (ie. total asset value, company bank account balances, etc.). However, while important, these factors can never paint the full picture of the overall value of one’s business. A business valuation draws upon a multitude of factors, which can each individually affect the growth or decline of value. It also helps to show company income and valuation data over time.  Knowing the true value of one’s business can often be a deciding factor in whether a sale is the best possible option for the owner.