Business Valuation And Why It Is Important?

By Author: Skillfin Learning
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Every business and startup needs business valuation and this needs to be updated frequently – year to year. Just like while looking for new opportunities an updated resume helps in the same way an updated business valuation allows a founder to take advantage of new opportunities and move quickly.

There are many business valuation methods depending on the circumstances of the valuation (for sale, investment, bankruptcy, etc.) When a business is being valued for sale or investment more than one method is applied to value the business. Many aspects are taken into account like economic analysis, future growth prospects with discounted cash flow models, industry analysis, and many more.

The process is similar to a property sale. An expert financial professional or a business appraiser analyzes the whole company using various business valuation formula. This process usually includes valuation of assets, future growth prospects, and financial predictions.

Why is Business Valuation Important?

Unexpected things ...
... happen in life. No one predicted COVID 19 and yet it happened and that why it is important for a business owner to be aware of the accurate company asset and company worth. When a problem arises and there is a need to scale up, scale down, invest, or merge estimates do not help. A business valuation helps a company to be aware of exact numbers and this in turn helps to reinvest, get the right insurance coverage and chart a future path.

If a major company wants to enter into a partnership with your business or even purchase your company, you need to show them the real-time value as a whole so that you get a good deal. And even when a partner leaves or you want to leave you will need the valuation to determine the buy-in or buy-out price. Getting a business valuation is one of the first steps in creating an exit strategy. Business valuation is needed for attracting investments too.

Once a business valuation is established it becomes easier for a founder to set new goals, make future projections, and work with more planning. Each year business needs to be valued to measure growth, profit, losses, and measure the room for improvement.

How to get Business Valuation Done

Financial experts, CA, finance professionals with expertise in business valuation methods can act as business appraiser to value your business. They estimate the value or worth of a company using business valuation formulas like financial analysis ratios, past analysis, and industry comparisons.

Anyone with a knowledge of accounting and finance can learn business valuation. It is easy to learn the business valuation method in Excel. Valuation modeling in Excel refers to various types of analysis, including discounted cash flow (DCF) analysis, comparable trading multiples, ratios such as vertical and horizontal analysis. Many types of analyses may be built from scratch in Excel or may use an existing template/model.

This type of work is commonly performed by a wide range of finance professionals. A business founder too can learn the same with easy to learn online courses.

Rajiv G. is a Strategy and Corporate Finance Consultant with 15+ years of experience. Previously, he has worked with the Strategy and Corporate Finance practice at McKinsey & Company. He has advised clients globally in multiple industries on various Strategy and Finance engagements. Prior to this, he has worked as an Equity Research Analyst with CRISIL. He is a CFA and Chartered Accountant.