Business Valuation: A Pathway to Growth and Success

Business valuation is useful in analyzing the success of an underlying business, resolving partner disputes, and determining employee benefits and retention plans. 

FREMONT, CA: Many entrepreneurs don't grasp business valuation. Business valuation determines how much a company is worth at a specific stage in its life cycle. The term value has multiple connotations depending on each individual's specific aspirations. The advantages of business valuation depend on the type of valuation.

According to investors, value means receiving the maximum return relative to the risk of losing an investment. Similarly, acquiring a business's worth is connected to the strategic benefits of purchasing a company. In both instances, the investor or buyer favors a lower evaluated value for the company. This is because such a value will generate a higher return on investment. However, an entrepreneur seeking funding or selling a business wants the highest possible valuation.

Stakeholders must recognize that business valuation is only the starting point for negotiations. This is not the final solution. Thus, they must understand both the underlying assumptions utilized in the valuation process and the final valuation number.

Some of the notable benefits of business valuation are listed below:

Understanding the company's performance: The primary benefit of conducting business valuation is that it aids in understanding the performance of the underlying business.

Business valuation entails reviewing a company's financial statements over the previous five years. This analysis type is conducted horizontally and vertically, enabling the business valuer to isolate trends and growth patterns.

In addition, the business valuer assesses the company's liquidity, coverage, leverage, and operational ratios for the last five years. He also conducts a thorough, industry-comparative financial study to determine the company's financial strengths and shortcomings. Such analysis enables business owners to objectively assess their company's health and performance. Furthermore, it provides detailed information about the company's past growth, profitability, debt capacity, and overall liquidity.

Moreover comparing the performance of each of these indicators to its industry enables owners to assess the organization's genuine performance. This in-depth research is a vital benchmarking tool because such analysis assists many stakeholders in businesses in isolating and understanding its trends, development patterns, and overall financial situation.

Evaluating employee benefits and retention plans: Other essential reasons for evaluating a business valuation include allowing for a stock bonus scheme for key employees and attracting potential employees to the company. In such cases, a company must have a base value in place. This is because such a value assists businesses in determining the value a key employee adds to the company over time.

A base value also helps a company compensate important personnel for their contributions to increased business value in the event of a future sale or merger. This is suitable for a wide range of plans, including stock option plans and phantom stock plans.