You start any business, to make it operate in a condition supporting its sustenance, constant evaluation and monitoring are required, just like the special training of a prospective candidate for a job. This is called business evaluation and is done in protecting the interest of the person or firm owning the business. Business Valuation can be described as a process of using certain procedures to evaluate the economic value of a business or an enterprise. The business may be owned by a single person or a management and the valuation is done on the current assets and aspects of the company towards a specific goal. The goal of evaluating your company may be any of the following:
- Your business is about to merge into or taken over by another company.
- You are selling the business due to reasons like retirement, debt, lack of resources or manpower, health or family issues etc.
- You are planning to sell some of the shares of the company on the stock trading platform.
- Solving disputes regarding assets, estate share, tax and divorce settlements, partnership interests, share settlement etc.
- Tax reporting considers valuation according to the company’s fair market value as a critical element for various parameters in taxation like gift tax, share gifting, sale and purchase agreements etc.
Through business valuation, the prospective buyer or acquiring company determines the price of your business. Even though finance experts and accountants can carry out business valuation, often employing a professional evaluator gives a better result and is preferred by larger business or when legal issues are involved.
Elements coming under objective evaluation
During the valuation process, the company’s assets alone are not evaluated. When we speak of a business, it has various cores and each core is important to the overall functioning of the business. The following elements are also subjected to objective analysis in financial terms:
- Materialistic properties
- Workforce including labor
- Machinery and tools
- Capital structure
- Balance sheet and yearly planning
- Scope for future expansion
- The market value of all the assets
Valuation of a business uses a number of tools and financial interpretations. The common Excel sheet serves as one of the most powerful tools in business valuation. Some common methods involve analyzing the financial statements, balance sheet, tax payments, and returns filed, discounting cash flows etc. There are definite mathematical models to evaluate a company and a valuator may use one or more of these models to arrive at a conclusive result.