Why You Need To Know The True Value Of A Business

Whether you’re buying or selling a business, you’ve likely taken into account the business’s value. Knowing the true value of a business means you won’t overpay for a business or undersell your own business. But how do you know the actual value of a business?

This article looks at the basics of business valuation, how a business’ value can be calculated, and what factors affect the value of your business. In addition, we will use our years of experience in the business buying and selling sector to help you understand why you need to know the actual value of a business. Learn more below!

The Basics of Business Valuation

Business value or valuation refers to the process of determining the economic worth of a business. It includes all aspects of the business, including tangible and intangible assets, liabilities, and the ability it has to generate future income.

A business valuation is conducted in a range of circumstances, including when buying or selling a business, when trying to obtain financing, when estate planning, for legal matters, and for personal matters, like during a divorce settlement.

Why an Accurate Business Valuation Matters

So, why does an accurate business valuation matter? There are actually a number of reasons that accuracy in valuing a business is essential. 

These may include any of the following:

Setting a Realistic Selling Price

Anyone selling a business will need to know the accurate value of their business to ensure they set a realistic selling price. A price that is too inflated may not attract any buyers, and underselling can result in a loss of profits from all your hard work.

To Make Informed Decisions

For most business matters, whether selling, buying, investing, or merging, having a precise valuation means you are making your decision with all the facts.

To Attract Investors or Lenders

When trying to finance a business through loans or investments, a thorough and precise valuation is necessary for most investors and lenders. It can ensure you secure finances and favourable loan terms.

For Business Planning

For business owners, having an accurate valuation of your business can help with strategic planning. It can help you set business goals and support overall growth that aligns with the value of the business and the potential the business has.

Factors That Affect Business Value

The value of a business can be affected by many factors. 

Factors can include:

The Financial Performance of the Business

Financial performance is often the most significant factor in the valuation of a business. It relies on metrics like revenue, profit margins, cash flow, and earnings. If the business is performing better, then it’s going to have a higher business value.

Market Conditions

The overall economic and industry-specific conditions can have an impact on the value of a business. If the business’s market is growing, it is likely to be valued higher.

Industry Trends

Another significant factor at play is the long-term prospects of the business within its industry. If the industry is growing and is set for future growth, valuation is higher.

Management and Talent

If you have a strong team and talented management, a business is likely to be valued more highly. Highly skilled teams can drive better growth and ensure the future of the company.

Innovation

A business with high levels of technological advancement and innovation can be valued more highly as they are up-to-date within their industry. In addition, it gives businesses a competitive edge and shows they are open to change.

Brand Reputation

If the company has a good reputation within its industry and among its customer base, its value is likely going to be higher. In contrast, a company that is not trusted or thought of well in its industry or with customers will have a lower business value.

Customer Base

A company that already has a solid customer base and the potential to grow the customer base will be valued more highly than a business with a smaller or less loyal customer base. A variety of metrics can impact these figures, including retention rates, customer relationships, and the diversity of a customer base.

Methods of Business Valuation

There are a few different kinds of business valuation methods, and the one that is used can vary per industry or per professional valuer. 

The forms can include any one or a combination of the following:

• Market Approach: This method involves using data from other business sales in the industry. It uses financial metrics and market multiples of comparable companies to estimate a valuation for a business.
• Income Approach: This method estimates the present value of the business’s future cash flows. There are two methods, including the Discounted Cash Flow (DCF) Analysis and the Capitalization of Earnings Method.
• Asset-Based Approach: There are two methods within this type: the Asset Accumulation Method and the Adjusted Net Asset Value Method. Both value the assets of the business to produce a fair market value.

Eden Exchange X Valutico

If you’re looking for an easy way to value your business, then you’ll be pleased to know that Eden Exchange has partnered with Valutico, a business valuation software company, to make valuing your business that much easier.

Whether you’re looking to buy or sell a business, knowing the actual value of a business is critical to making an informed decision and getting the best price. Valutico offers a powerful, all-in-one valuation tool to give you an accurate valuation in minutes.

Combined with Eden Exchange’s revolutionary virtual lead room, Valutico can take you from lead to deal in no time and ensure that you’re paying the right price for the business you’re buying.

Learn more about Valutico.

Final Thoughts

Business value is incredibly important to anyone looking to buy or sell a business. It gives you an accurate representation of what you’re buying and whether you’re getting a fair price for it.

For business sellers, your business value may be challenging to work out on your own. As you’ve likely spent years building your business from scratch, you can be biased in your valuations, which is why it is always best left to the experts.

Eden Exchange’s work with Valutico is a revolutionary partnership that will change the way you approach business valuations. If you’re looking for an accurate business valuation tool to use in combination with the exceptional resources provided by Eden Exchange, then contact our team now to find out more. 

Who we are

Eden Exchange is an integrated multi-channel platform, simplifying business buying and selling. We match, refer and connect business buyers, sellers & brokers in an ecosystem that facilitates frictionless franchise, business and finance transactions. Visit www.EdenExchange.com and connect with our engaged and multidimensional transaction network today.