Business Valuation: How much is your Business worth?

To understand the value of the business, an entrepreneur would choose valuation. Valuation is the phenomenon used to understand and calculate the real value of the business.

What is Business Valuation?

Business Valuation is one of the most important factors that determine the success of your business. Valuation is the process of determining the worth of an asset and how it can be helpful to a company. Therefore, when we speak of business valuation we are talking about a process that estimates the economic value of an owner’s interest or share in a business or valuing the business by taking into account fair values of assets and various other factors

Business Valuation is an art as well as science, depending on an analyst’s perception regarding the health of the business and its future graph. Hence valuation can be understood as determining the fair value of a particular asset, an instrument, or the company as a whole.

Factors that determine business valuation are as follows:

• Nature of the Business. 
• Past financial record of the business. 
• Economic conditions affect the business’s modus operandi. 
• Value of Assets and Liabilities. 
• Any patented technology or product of the business. 

How do you find the VALUE of your Business?

Your business’s worth determines its health and paves the way forward for you. As a business owner, the valuation shall help you take up new strategies to boost it and put it on a growth-oriented vehicle. 

Now, the valuation of your business is done using three different methods or approaches. 

Let’s look into it and chalk out your next winning move for your business:

Approach 1: Asset-based

In this approach, the business’s assets and liabilities are taken into account. The value of the business is calculated by taking out the difference between the assets and liabilities. This type of approach is also known as the cost-based approach.

A valuation expert using this form of approach would concentrate more on the assets present with the business. The total net worth of the business is determined based on the number of assets present with the business. Such value is calculated using the replacement cost of the asset and subtracting it by the damages to the asset. Such an approach is based on the factor that the buyer would pay more for the asset.

The asset-based approach also helps you find out the book value of the business. The book value is the Owner’s Equity on the Balance Sheet of the Company. In layman’s terms, the book value is the lowest value you will be agreeing to sell your business.

This approach gives you insights into your debt-management mechanism, which should be done optimally to increase the value of assets. 

Approach 2: Market-based

The market-based valuation approach compares your business to similar companies in the market. The value of your company depends on the prevailing market conditions for business organizations, such as yours. In this approach, the valuation expert would consider the market value of the particular asset and compares it with similar assets which are present in the market. The qualitative and quantitative features of a particular asset would be utilized to determine the value of the product.

The approach gives you an approximation of the fair market value of your business i.e., is the value that buyers will be willing to pay for your business. As this approach predominately compares the business or asset with other assets in the market, such an approach is known as the comparison approach.

Approach 3: Income-based

The income-based approach flips over your past financial records and calculates the valuation of your business. Your books speak volumes about the performance of your business. Thus, it is the right way to show your investor or buyer whether you are a profitable and low-risk business or not. The previous earnings of the business are considered in this approach to determine valuation. Such principle is determined that the value of the business is determined on the current value.

As a business owner, you have to insist this confidence in the minds of your buyer or investor that he/she shall recover the money invested in your business. An enhanced ability to pay off the debts reflects low risks and a profitable investment opportunity. This method looks into your past cash flow trend and future cash flows. Your books give a forecast about future profits as well. 

These projections determine the value of your business and help you devise plans to improve the numbers on your books. 

Who does your Business Valuation?

Now that we have known about the various approaches to Business Valuation, we have to know who is professionally qualified to carry out valuations. A valuation cannot be carried out by any individual. The people who do it cannot be any person who is associated with the business. Such individuals should not have any forms of conflicts of interest with the business.

Valuation of your business is present under the provisions of the Companies Act, 2013. The person valuing your business should be a Registered License Holder.  Apart from the Companies Act, 2013 the provisions under the Securities Exchange Board of India (SEBI) govern valuation provisions. A valuation expert would be recognized under SEBI as a merchant banker or a Chartered Accountant. Such individuals have to comply with the rules of valuation laid down by the Institute of Chartered Accountants of India (ICAI). Non-compliance with the rules of Business Valuation can lead to serious consequences. 

When should I consider valuation for my Business?

Business Valuation is an important part of running a business as it introduces the owner to several metrics that can be worked on to improve the business. In addition to knowing how to value your business, business owners should also know when they should value their business. 

In the steps mentioned below, we shall look into as to when the valuation of a business should be done:

• If there is a sudden change in ownership of the business or the business is being passed on as part of a succession plan. 
• Shares of the business are being gifted to members of the family. 
• Business is going through a merger or acquisition process. 
• Business is looking forward to inviting a new shareholder or a partner onboard or the business is planning to let go of a partner or shareholder. 
• The business wants to attract investors to raise capital for its further operations.
• When negotiating with banks, venture capitalists, or other prospective investors, an objective valuation will help in raising capital.
• The business is looking forward to establishing or updating its Employee Stock Option Plan (ESOP).
• Business Valuation should be done for tax purposes. Knowing the value of your business is necessary to sufficiently fund a future tax liability.
• Shares that are being valued under the provisions of the Foreign Exchange Management Act, 1999.

Conclusion

Therefore, knowing the health of your business is very important before you move forward to implement any new strategy. It gives you an added advantage when it comes to the settlement of claims, closing deals, and exploring new prospects for your business. 

Last but not least, Business Valuation is a major factor that helps you to gain trust amongst your stakeholders. Hence, it’s not enough to work on your idea, alone, to turn it into a business.  

It requires you to monitor the health of your business regularly to make it reach that level you have planned.