Why are valuations needed

Valuations provide a baseline. Some years your value may be up, other years it may be down a little bit particularly in the event of a market correction. Valuations help chart the course for the future.

Valuations can help you determine ways to improve the business. Perhaps a valuation will indicate the need for a technology investment or hiring an employee. Valuations can often help an owner make a change to the business or assist with a decision they may have been having difficulty with. Valuations measure progress. To be most effective, valuations should be utilized in tandem with your strategic business plan and should be referred to as a component of any significant decision.

Valuations can identify gaps. A comprehensive valuation will utilize key performance indicators KPIs to look at the non-financial aspects of a business that are actually the underlying value drivers. Examples are corporate structure, client demographics, technology usage, and firm infrastructure. KPIs are instrumental in identifying areas of potential improvement for the business — and ultimately provide ways to increase value.

Valuation can be a very complex process. In order to price the deal right, you need to figure out which approach will best work for your company and which one really applies.

There are three primary business valuation theories that fall into the following groups:. In comparison, the asset approach determines business value based on the assets of the company. This is where you might engage an appraiser to discuss value of assets based on market value and possible liquidation.

The market approach decides the value by comparing it to similar companies. A valuation professional will focus on the comparative transaction method. Then, they will appraise competitive sales of comparable businesses to estimate the economic performance of revenue or profits.

This works well with publicly traded companies where earnings information is readily available or when looking at real estate it is easy to find recent comparable transactions. There are a couple valuation destroyers to watch out for. Some of the destroyers of value include having:. To discover other potential destroyers of value and to learn about the above three destroyers, click here to access our free Top 10 Destroyers of Value whitepaper. This tool enables you to maximize potential value before you exit.

Click here to access your Execution Plan. Not a Lab Member? Leave Us A Review! CFO Training. Why Valuation Matters Before we go into why valuation matters, we need to know what valuation is and why a company needs to be valued.

How To Deal with Valuation When dealing with the valuation process , it is important to get as many facts as possible with clear goals.

Valuation for Disputes Shareholder or Divorce When a couple divorces, they need to divide the assets and business interests from one another. Surprisingly, many entrepreneurs do not make the time to measure the value and potential of their business annually. You have worked hard to build this asset, and you should know the value of your hard work in the present and for the future.

Most of us visit our doctor annually to get our vitals checked and prioritizing your business in this manner is just as wise. Here are nine reasons you need a business valuation, whether you want to acquire a business, plan for succession or sell your company. Create a baseline value for your company to know where you stand in the marketplace. Know how far your company has come since its inception. Understand how your company competes in the now.

When you measure this data, you can quantify it in a more meaningful way that motivates both you and your employees toward future growth. A business valuation helps establish a baseline value which enables you to create more informed financial goals, business strategies and marketing objectives. Nearing retirement age? Given thought to an exit strategy? Unfortunately, you cannot exit stage left and take a quick bow. As with anything in business, you need a plan.

Waiting may mean that you end up rushing to close or sell your business and get less back than you put into your business. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes.

Your Money. Personal Finance. Your Practice. Popular Courses. Part Of. Introduction to Company Valuation. Financial Statements. Financial Ratios. Fundamental Analysis Basics. Fundamental Analysis Tools and Methods. Valuing Non-Public Companies. What Is a Business Valuation? Key Takeaways Business valuation determines the economic value of a business or business unit.

Several methods of valuing a business exist, such as looking at its market cap, earnings multipliers, or book value, among others. Article Sources. Investopedia requires writers to use primary sources to support their work.