Why a business valuation?
It goes without saying that a business valuation is necessary when selling a company. After all, the seller wants an indication of the value of what he is selling. However, it is not obvious to have the company valued when a sale is on the agenda. However, it is sensible to do so. For example, there may be various stakeholders, such as the entrepreneur, his family, a strategist, the management who want to have insight into the (value) development. Or sometimes there is a direct reason, such as the illness or death of the entrepreneur, to have the business valued.
A business valuation involves a business valuation professional determining the economic value of a business. The purest way of doing this is by determining the free cash flows in the coming years. By discounting these (future) cash flows to the present (usually based on a so-called Discounted Cash Flow method), the professional determines the value of the company.
There are 5 important reasons to have a business valuation carried out
A valuation when selling your company
The most common reason for having a business appraised is when the sale of a company is on the agenda. It may also be necessary to prepare a valuation when a business is being handed over within a family firm. Other common reasons are legal disputes or tax issues.
An appreciation in raising finance
An entrepreneur may also decide to have a business valuation done and use it if he wants to raise venture capital or financing. In effect, the entrepreneur is selling an equity stake. Through business valuation, the entrepreneur can determine how many of his shares he wants to sell to receive a certain amount for his shares and additional capital.
A valuation to identify the value drivers of your business
The value drivers determine to a large extent the value of a company. As an entrepreneur you want to maximize this of course. A business valuation can help you realize the most important value drivers for your company. Subsequently, the entrepreneur can focus on these and thus achieve a higher return and sales value.
A valuation to assess future opportunities
An interested buyer is not so much interested in historical results. The most important factors for a buyer to take over a company are the opportunities that lie in the future. Therefore, the entrepreneur will have to look ahead when he has a business valuation done. He will have to study the market development, competitors and make (realistic) forecasts.
A valuation to provide insight into the development
Finally, a business valuation can be adjusted annually, so that an entrepreneur can keep a close eye on developments over the years and work in good time on an exit.