Why business valuations are essential for growth (not just sale)

Business valuations are typically performed by business owners looking to sell a business or by potential buyers looking to purchase a business. However, business valuations can be an extremely useful tool for business owners in a variety of situations. Most usefully, business valuations can be used to identify those areas that are detracting from the overall economic value of a business. This clarity allows business owners to address these issues and subsequently increase the overall value. Unfortunately, business valuations are under-rated and many business owners are failing to utilise this tool in business operations outside purchase and sale.

There are several different methods of valuation which can be categorised under three main approaches;

  1. the income approach;
  2. the asset approach; and
  3. the market approach.

Income approaches focus on ratio analysis and generally measure the discounted cash-flow or net benefit stream of the business. Asset approaches simply calculate the net asset value of a business (sum the parts of the business). Market approaches focus on the economic and industry information and are typically comparison based, measuring the valued business against other businesses that share specific demographic and criterion-related commonalities.

Each category covers quite a number of valuation methods, and each method has particular benefits and drawbacks. However, although a plethora of options exist, there is much grey area in terms of which technique is right for an individual business. To decide on how best to value your business, you must first consider the reasons behind performing one. Be it purchase or sale, partner acquisition, or perhaps simply to analyse the internal workings of your business for areas that need improvement, first one must consider the premise of value. It is then highly recommended to spend time researching the appropriate choices. Finally, consult a completely independent third party, preferably a broker or better yet, a business valuer. In this way you will provide the clarity you need to make the right decision.

2 thoughts on “Why business valuations are essential for growth (not just sale)

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