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    Home»Business»Why Is It Important to Conduct a Business Valuation?     
    Business

    Why Is It Important to Conduct a Business Valuation?     

    David GBy David GSeptember 9, 2024Updated:September 23, 2024No Comments6 Mins Read
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    How to conduct a Business Valuation
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    Do you know the actual worth of your small business enterprise? Countless business owners are clueless when it comes to assessing the actual value of their businesses.

    This might be simply because they are not actively engaged in the daily running of the business. For many small business owners, consulting professional business valuation services is not always at the top of their list until when securing an external investment.

    Surprisingly, the entry of new competitors, the same old customer buying habits, and technological advancement may likely turn your profits into losses.

    The Nairobi Tribune has formulated this article to help you understand the strategies of key business valuation services, and how evaluating your small business can make you achieve a swift competitive advantage going forward.

    What Are Business Valuation Services?

    Business valuation service is the process used to evaluate the economic worth of a business.

    After the valuation, you receive a comprehensive objective estimate of the total value of your business through the analysis of the entire aspects of your business such as;

    • The management of the business
    • Financial performance and future revenue
    • The capital structure
    • The current market value of your business’ assets
    • Related liabilities
    • Nature of the business
    • Economic conditions

    Seeking the services of a certified professional analyst will ensure that the valuation of your business is performed within the set guidelines and standards. These results will be more reliable and accurate enough to defend your business even before a court of law.

    Often a business valuation service is conducted when;

    • You require an in-depth tax analysis
    • You want to merge or sell to another business
    • In need of equity for expansion purposes
    • Conducting a succession plan or change in ownership
    • Going through a divorce
    • Welcoming a new partner or shareholder

    Also check out How to Write a Business Plan in Kenya in 2024 (Ultimate Guide)

    How to conduct a business valuation

    Generally, a business valuation process is influenced by changing economic conditions and demand for the products and services of your business. During business valuation process, your valuation analyst will consider the relevant information available and choose the most appropriate approach.

    1. Asset-Based Approach
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    This approach determines the standard market value of your business’ assets minus all related liabilities. The entire investments of your business are totaled in one of the following approaches;

    • Liquidation asset-based

    This approach is used when analyzing the net cash value or the liquidation value of your business if all the assets of your business were sold and every liability paid off. This method is most common for business owners seeking to sell their businesses or getting out from under the business.

    • Going concern asset-based

    The analyst using the going concern asset-based method analyzes the total assets of your business and subtracts the total liabilities after reviewing the balance sheet of your business’s financial standing.

    • The Market Value of Assets Owned

    This approach prompts your valuation analyst to assess the recent sales of your business as compiled in your financial database.

    The valuation service provider might be required to modify the actual sales to reflect the variation between the business undervaluation and the business sold.

    When determining the market value of your business’ assets, you might lose money if your business is undervalued. Therefore, the best way to achieve accurate value for your company is to seek the services of an experienced business valuation analyst with professional business accounting services to advise you on the best valuation approach for your business.

    • Future Earnings

    The future earnings approach is divided into two main valuations;

    • The capitalization of earnings
    • Discounted cash flow method

    This method is used to determine the value of your business by examining the net present value of the estimated future profits, the annual rate of return, and the present cash flows. Typically, the worth of your business is calculated by discounting the future earnings.

    • An analysis of the future earnings prospects

    The business valuation service analyst may consider analyzing the future earnings prospects to determine the performance of your business and discover whether your business is undervalued.

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    By looking into the mode of financing, liabilities, operation costs, and assets. Your business will be considered profitable if it has a high earning per share.

    • Capital Structure

    The capital structure is the amount of equity or debt used to finance the operations of your business, funding assets, and acquisitions.

    Your business valuator uses the capital structure to discover the standard levels of debt and equity affecting cash flow and risks and determine the amount an interested shareholder will be willing to pay.

    • How Assets Are Financed

    Assets financing is borrowing that enables your business to acquire assets such as machinery without buying them upfront.

    The borrowing business uses the balance sheets assets, inventory, short-term investments, and accounts receivable to borrow funds by providing the lender an interest in the security of the asset.

    The amount of funding you receive by asset financing is determined by the creditworthiness and specific market value of your business’ assets.

    Given the significant role a business valuation in the financial future of your small business enterprise, it is in the interest of your business to consult an expert to help with valuation of your business.

    Business valuation services use the strategies listed above to help you achieve your business goals based on your specific business requirements.

    Conclusion

    Hiring a business valuation service provider is the surest way to maintain a strong competitive power and avoid undervaluing your business in the case of an acquisition or merger.

    Performing a regular valuation of your small business will help you track the progress of your business and uncover growth opportunities over time.

    Whether it’s your business rival seeking to buy you out of the market, establishing a solid competitive edge will enable your small business to stay afloat and navigate the current global economic instabilities.

    Business valuation will offer you expert advice on how to maximize your investment returns and pay off your debt as you gain a competitive advantage over your business rivals.

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    David G

    David Githaiga is a professional writer and editor at tribune.co.ke. He is a graduate and holds a BBA in Accounting with Information Technology. David has over 7 years experience in digital writing. His work has been published in social justice website (Canada) among others, He is a current board member at Critical Mass Sports Organization (Kenya). While away from his desk, David enjoys cycling and having fun outdoors.

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