If we are about to sell or purchase any product, how are we supposed to decide its price? Most probably we will compare it with the price of similar products and add or subtract the price as per the features. But what if it is a new product with totally different specifications? We will have to work on its price, its actual value.
In the same way, business valuation companies work towards valuation of a business. The concept of business valuation can be understood more clearly if we think from the point of view of the purchaser. Suppose, Mr. X wants to expand his catering business by purchasing an existing business of a chain of restaurants. He will have to calculate the value of all the assets of the restaurant and then think of paying at least the replacement cost of the assets as it is an existing business. In addition, its goodwill, status of the financial statements and all the other economic factors are needed to be checked.
The situations where business valuation companies play a vital role in the company are listed as follows:
- Understanding your business:
An owner may feel that he needs to understand his business. By doing so, he may get an idea about the strength and weaknesses of his company, and know what about the position of his company is. Knowing about a weakness is surely essential and it will help to increase the business’ value.
- Personal Reasons:
If a person having a well-settled business faces a situation of crises in his personal life, where he is forced to part away with some part of his business or when a person knowingly transfers some part of his business as a gift just to avoid taxes.
The most important person in case of liquidation is an asset valuer. He has to calculate the value of the whole business in order to decide the proportion of payment of debts and equity.
- Merger and acquisition:
When you plan to merge with a company or go for an acquisition, you must know the correct value of your firm as well as the one you are acquiring. Without knowing the correct value, you would fail to crack a correct deal.
- Business Financing:
A bank or any other organization will provide you finance only after knowing your firm’s value. The value of your firm as per the business valuation companies will provide a base to them for understanding your repaying capacity.
The importance of valuation may be clearly understood in the above situations. Where an incorrect valuation would give you a heavy loss and a correct decision would give you a lifetime experience. We don’t realize the importance of a thing unless we are in utmost need of it.
We cannot predict uncertainties; all we can do is have a pre-determined plan of action for it. Business valuation companies are such firms that would help you make this pre-determined plan of action worth it.