3 Different Reasons to Get a Business Valuation

3 Different Reasons to Get a Business Valuation

The valuation of your business defines its fair market value. This assessment needs to be as accurate as possible, as it is critical to the management of your business. As management guru Peter Drucker said: “You can’t manage what you can’t measure.”

Essentially, this means that managing a business can succeed only if its valuation is accurately definition. Tracking of this valuation is also essential, as the assets of your business appreciate or depreciate over time. 

Choosing an independent and expert business valuer will ensure you receive an accurate current market value of your business and gain insight into its standing both in internal operation and in its industry overall. 

There are three major areas in managing your business where its valuation is at play. You will need to get the exact value of your business in the decision-making involved in the following:   

Business Expansion

You will need an objective valuation of your business in growing its operations. The strategic planning involved in a business expansion requires that you have a baseline value to gauge your market standing. 

Knowing your place on the market makes you understand how competitive you are and helps you establish areas for improvement. Business valuation, therefore, can help set the growth objectives of your business for the future. It thus also contributes to motivating you and your employees to push for that future growth.    

In relation to growing your business, a credible valuation of your business is crucial if you plan to seek expansion funding. Potential investors or financial institutions will certainly scrutinize the value of your assets. To gain financing, you will have to present professional documentation.

Asset Management

Determining the true worth of your business is a must in the many facets of managing your assets. Foremost of these concerns is protecting the value of your assets, a necessity that can occur in several ways. 

If your business is a partnership, business valuation comes to the forefront in a buying/selling situation between or amongst co-owners. The ownership transition goes on smoothly with a fair market valuation of the business. 

If you’re the one selling, you would surely want a good price for the assets you share in the business. After all, you spent time, resources, and energy to build the business.  The same works for your business partner or co-owner.

These buy-sell agreements with partners will spell out the terms of the buyout, including its funding and other terms. Notably, a buyout can happen in several ways, such as when you or your business partner is retiring or shifting to another business. Hence, it is advisable to have annual business valuations as part of keeping your operations updated.  

Your business likewise requires a professional appraisal of its value in case you are acquiring or merging with another enterprise. To a great extent, the business valuations of both merging parties will determine the organizational structure of the resulting entity. And so with the apportionment of returns on the investments of all the contracting parties.

Knowing the real value of your most prized business assets allows you to protect these best. Legal challenges can occur in buying-selling agreements as well as in mergers or acquisitions. A divorce can likewise trigger legal complications, making business valuations critically important. 

Documenting your business worth is also essential in providing insurance coverage to assets like office buildings and capital equipment. This coverage protecting a business property from damage or loss allows better risk management. Without insurance, you face the prospect of paying out-of-pocket for repairs. This instance is particularly problematic if you’re paying a mortgage for the damaged property that has been rendered unproductive. 

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Tax Management 

Your business worth is an important element in the kind of tax planning you need to do for your venture. Taxation is on the heels of many activities of your business. These include many of the situations cited above regarding business expansion and asset management.

For tax purposes, some of the situations where you need to know the market value of your business include the following:

  • capital structure changes 
  • changes of ownership
  • company divestments
  • capital gains tax rollovers
  • company acquisitions
  • entry to a consolidated group
  • formation of a consolidated group
  • exit from a consolidated group

Summing it all up, the valuation of a business is a dynamic component of the strategic planning of its operations. It helps shape the future of an enterprise and thus calls for an expert assessor who can present a true picture of its worth.