How to value a company – The usefulness of the business valuation

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You may not think it is necessary to know the value of your own company. However, there are several good reasons why you should know how to value your company and do it on a regular basis:

 

  • Understanding The Company Assets

 

It’s a good idea to make yourself aware of what assets your company owns and how these compare to previous years. This will also allow you to properly assess the financial position of your company.

It is important to use exact figures when calculating the values of the company assets. This isn’t just beneficial to understand the company position; it also allows you to sort out insurance.

 

  • Resale Value

 

When you’re first deciding on the best method of forming a company you’re probably not thinking about the resale value. After all, the company will be your dream.

But, once you’ve been trading for a while the resale value gives you an idea of what your company may actually be worth; this could be a useful piece of information when dealing with a potential takeover or if the competition is just too much for you.

 

  • Funding

 

If you’re looking for investment then you need to have an accurate picture regarding the value of your own business. The value doesn’t just show what your company is worth, it will also allow investors to see where their money will be going and how likely it is that they’ll get their funds returned.

The Process Of Valuing A Company

There are many ways of valuing a company but the one that is generally accepted and most commonly used is based on the revenue stream of the company.

You’ll need to know an accurate figure for the annual revenue. This is then multiplied by 3; giving the apparent value of the company, and a price that you’ll need to be willing to pay.

Of course, a business is really only worth what someone is willing to pay; that’s why the following factors should be taken into account when valuing your business:

Assets

The value of the assets of the company less any debts they have outstanding equates to what the company is actually worth; if you had to sell all the equipment and other physical assets.

But, this is just one part of the physical value of a company.

Competition/Market

It is also important to consider what the market is doing. A weak market and plenty of competition will make it less likely that the company can continue its current level of sales. This is an important consideration when deciding if a company is worth as much as its assets and sales say it is.

 There are, of course, many other ways of evaluating the value of a business; none of which are wrong. The important thing is to be fair and open-minded in your approach. This will help you to find a value that can be justified and attract the right buyers or investors.