Valuation of the business is often undertaken in case of conflict or litigation to determine sale price negotiations, financial planning, or even succession planning. But the benefits of valuation that are often ignored are that the process acts as a catalyst for enhancing the value of the business by making more informed decisions. A valuation can often result in a reality check. The owners will be able to determine if their business is overvalued as it is a human tendency to overvalue the assets. It helps businesses ensure it has the right debt structure and identify the focus areas to enhance their business.
The following are the ways in which business valuation will help to enhance the value of the business:
A business valuation gives a more forensic understanding of the business. It gives a fair picture of the expenses that must be reduced, the revenues that can be improved, which will result in higher profits and increased cash flows. Better knowledge of the business eventually leads to lowering the risks or being prepared for facing them. Over a period of time, higher cash flows, increased profits, and reduced risk can increase the value of the business.
Business Valuation is a complete health check of the business and not just a summary of profit and loss. This helps the business to strategically plan going forward and ultimately enhance the overall business value.
A business valuation helps in identifying the weakness in its operations or a process. This identification can help the business perform at its optimal. It could be as simple as reducing costs or better inventory management or training staff to upskill them.
Business valuation not only helps in identifying the weakness but also highlights the driving value of the business. Businesses can concentrate on these areas and enhance the value of the business. Value drivers are the areas that have a significant impact on the performance of the business. It could be innovative technology, human capital, brand recognition or client base. Businesses can focus on these areas and derive optimum value for their business.
Business valuation is a tool to conduct risk profiling of the business. Valuation is not determining the value of the business for the owner; instead it is determining the transferable value of the business. Transferable value is based on the risk factor attached to the business. What may seem to be a great value driver by the business owner can be viewed as a risk attached to the business by the potential investor.
An example of this is where the client base composition is determined by one or two top clients determining 50% or more of the income. For the business, it might look like an advantage, but for the investor, it determines great risk. The business with a more diverse client base will attract more value.
A business valuation will save the business from being overvalued and hence prevent going overboard with debt creation. So business valuation helps maintain a good debt structure.
Periodic valuation of the business can add great value to the business, mitigate risk, and help the business grow substantially.
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