What is Business Valuation?
The term business valuation is the method by which the business worth is determined. This usually happens when the business is for sale, when the business is looking for extra funding from the banks, when the business is considering taking on extra investors, or where the business is looking at merging with another organisation.
Aspects of Valuing a Business
A business is worth whatever someone else is prepared to pay for it and therefore its value will vary from person to person. There are many ways to value a business and the final price will differ, depending on the method used.
When the business is for sale, the price the seller wants is usually never the price received. This is because the seller's perception of the value is usually much higher than the buyer's. The final price is usually in between because the buyer and seller will negotiate an agreed figure.
Value against Ability to Make a Profit
When purchasing a business, obtain professional advice regarding the valuation. You need to be happy that you are not paying more than what you believe it is worth. If you pay too much and encounter financial problems later on, your capital reserves will diminish very quickly, because the business will not perform to the level indicated by the seller.
In general, a business should be valued against the ability it has for making profits. Other factors, such as the ability to generate good cash flows, or the consistency of profits, or a potential for growth and the lack of competitors, will have an effect on the price. Because each business is unique, it is important to use the most appropriate valuation method that does justice to the particular business and it's potential.
Finding True Worth of the Business
If you are buying a business it is important to calculate the true worth of the business on offer. This can be a problem for a prospective buyer. It is for this reason that the buyer should seek professional advice, both from a business valuer or accountant, as well as from a business broker who deals in the type of business offered by the seller.
From the buyer's point of view, buying a business is an investment decision and, as with any other investment decision, the net worth or value will be based upon the ability of the business to provide returns.
These returns are represented by the profits the business makes, so the value of available profits will have a bearing on the net worth (or price) finally agreed to by both parties. An area that requires special attention is goodwill.
Goodwill has many definitions, but one of the simpler explanations for goodwill is; it assumes that because the business has been running with an established clientele or customer base for some time, the clientele or customer base will keep coming to the business for their requirements, thus creating a value known as goodwill.
Price based on Asset Values
When a business is put on the market to be sold, the owner (seller) will ask for a price based on the asset value, plus its ability to generate profits for the potential new owner. Assets could mean; plant and equipment, stocks, branding, trademarks and licences etc. owned by the business. Valuing assets is fairly easy. However, arriving at the true value of the assets is not always straightforward.
For example, the assets would be valued in the books of the business at a different valuation than in the current market. Some assets (such as computers), may be in the business books at $4,000 being the original cost less depreciation, and yet because of the advancement in technology, that same computer could now be worth half that.
A potential owner will therefore only be prepared to pay market value, rather than the original cost, less depreciation. Another intangible asset valued is known as goodwill, (already explained above). Also, another asset, (which can be termed intangible) is intellectual property.
Intellectual property relates to the patents, trademark and other trade secrets and designs, which are owned by the business. Because they are unique to the business they have value.
Copyright 2005 StartRunGrow
http://www.startrungrow.com
StartRunGrow (http://www.startrungrow.com) is a global online information organization that specializes in creating, developing and marketing business help information specifically with the aim of "making business easier" for entrepreneurs around the world. The StartRunGrow objective is to become a dominant player in the business help arena providing end to end solutions for the millions of small and medium businesses worldwide who continue to struggle daily with the difficulties of starting, running and growing a successful business.
Lincoln Stretch rentals Alsip ..The success of your business depends on your ability to... Read More
1. There Are No "gimmes" ? They count two-foot putts... Read More
When working properly, computers enable small businesses to make big... Read More
North County San Diego has had some significant growth, and... Read More
On June 8, 2004, the world witnessed what no one... Read More
What's your job profitability? Do you know?Many business owners are... Read More
So what exactly is a "Small Business Lone Ranger?" A... Read More
When small businesses fail, the wreckage is often assigned to... Read More
What would happen if you decided to take an extended... Read More
So it's time to invest some finances into advertising your... Read More
Perhaps you are building a new home office or you... Read More
Tammy, a skilled and gifted horticulturist, called me to discuss... Read More
Why are Chambers a good launching pad?Chambers provide you with... Read More
Cash flow. To stay in business, you've got to keep... Read More
Top 3 Ways to Maximize Your Small Business Server Consulting... Read More
E-mail and Internet use are integral parts of the typical... Read More
My 16 year-old daughter said, "Gee Dad! You look just... Read More
Now that winter has passed, the annual ritual of spring... Read More
"So what?" is a lovely question.It can lead to a... Read More
It's a commonly quoted statistic: 80% of all small businesses... Read More
Manufactured and Mobile Home owners know that the weather this... Read More
CARD SHARK7 Card Tricks That Improve Your Personal Networking PowerThe... Read More
There are many factors to be considered when you are... Read More
A Private Investigator is a professional trained in the art... Read More
Early in my career, I wrote an article for a... Read More
Western Springs shuttle limo ..Commonly folks have asked me what the technical difference is... Read More
Approximately 200,000 new businesses are started each year. More people... Read More
KEEPING INTEREST HIGH: Supervision is key to the success of... Read More
Now that you have invested your time, energy and money... Read More
With all the cabinet refacing business opportunities out there, you... Read More
So it's time to invest some finances into advertising your... Read More
A lot of business owners I've spoken with lately have... Read More
Would you rather have one good client paying you five... Read More
Sometimes when you run a business you feel as lonely... Read More
On June 8, 2004, the world witnessed what no one... Read More
Mr/Ms, 'not me' is often on holidays in your business.... Read More
1. Know Where You're Going ? Coach Herb Brooks had... Read More
Most of us remember going to at least one garage... Read More
BioTechs even with the latest news had shed over 1000... Read More
You're a small business owner with a hot new product... Read More
Paper Shredding Business Opportunities are blossoming up everywhere because in... Read More
Security Professionals provide the products and services necessary to create... Read More
Most doctors never distinguish the difference between customers and patients.... Read More
10 Best Practices to consider as your SBIR negotiations approach... Read More
The Service-Disabled Veteran-Owned Small Businesses (SDVOSB) is a program that... Read More
What is the satisfaction & expectation review of the business... Read More
Q: After years of dreaming about starting my own business,... Read More
Whether it has been thrust upon you by external market... Read More
So you want to start a business but you don't... Read More
You've always liked flowers and you think the idea of... Read More
Small Business |