Business valuations: what are they and what do they involve?
A term that may come up during your business journey is ‘business valuation’. It might seem like a very nebulous term, but business valuations are relatively straightforward. They’re used to figure out the economic value of a business. This could be the company as a whole or an individual unit within it.
While it’s common to assume valuations only happen before selling or buying a business, there are actually a plethora of reasons you might want to value your business. These include:
- Before selling/buying a business
- When buying/selling shares
- To assist with divorce proceedings or at the termination of a business partnership
- When securing investment
- Before growing/expanding your business
Let’s take some time to dive into exactly how business valuations work and how you can prepare for them.
What should business valuations take into account?
You want to strike a balance when it comes to your business valuations. While you don’t want to oversell your business and set unrealistic expectations for a buyer or shareholder, you also don’t want to sell yourself short.
As well as tangible assets – such as stock or property – and those with clear value, business valuations must take into account intangible assets too. These include things like your business’s reputation, trademarks, the reason for the valuation, your product or service offering, and the team you currently have on-board.
The sheer variety of considerations to make shows why it can be difficult to reach a clear-cut valuation for any business. And with over 50% of business owners estimated to try to sell their business themselves, it can be a difficult process to get right. It’s often said that a mix of valuation methods is preferable to just following one.
What do I need them for?
The obvious answer is if you’re looking to sell your business. A valuation will go a long way in influencing the amount buyers will offer.
That being said, valuations aren’t the be all and end all. Buyers will all prioritise different factors, and there are plenty of intangible aspects to consider when buying a business. For example, a business with excellent relationships and a strong supply chain could be more attractive than another that technically has a higher value on paper.
If you’re looking to improve your business and add to its value – perhaps with the intent of selling at a later date or just to increase profitability – annual valuations can be great for identifying areas of improvement. The areas of the business that let the general value down are perfect places to focus your time and resources when implementing changes.
Business valuations are a fairly simple concept to understand. But they can prove essential when selling your business, shares, or when looking to grow.
At Big Hand, we’re an expert business consultancy who can take care of all your business and accountancy needs. Whether you’re looking to sell or add value to your business, we’re here to help. Get in touch on 0161 327 2911.