Why is Business Valuation Important?

Business valuation is the procedure for evaluating the economic value of the business. And there are different reasons why the business valuation is necessary to perform. It can be for selling the business, sale of stocks, attract investors, internal decision-making, tax purposes, etc. The importance of business valuation can’t be taken for granted since knowing your business’s value can help you add or lose value for your company.

Presented below are the different reasons why the business valuation is a necessary process that needs to be undertaken.

• Providing a Baseline

Knowing the business value can provide a baseline of how the business is doing. It can check which part of the company is giving value and revenue sources, and aspects that need to be improved. You can’t keep track of the progress at all if you don’t know the baseline of your company valuation.

• To Evaluate Resale Value

If you are going to sell the company soon, you must know your business worth and what needs for improvement so that you can work out of increasing the company’s price. You can also reject a low offer than your business true worth or negotiate for a higher price. 

• Valuation Sets Business Direction

By knowing your business foundation, you can set a goal of where you want to be. A valuation can help you improve your business since it can be evaluated in which aspect is lacking. Some expenses can be eliminated or can add a revenue stream to generate more income for the company. The valuation can help make decisions and some changes for business improvement.

• Helps Measure Progress and Manage the Business 

Business valuation, if done regularly, can help check the progress. To be effective, it needs to be in line with the strategic business plan and a significant component for decision making. Valuation should also be one of the powerful drivers in managing the business. It helps make a decision that has an impact on the business’s bottom line. Unforeseen consequences can be avoided if you know the business dynamics and worth.

• Sets Accountability 

Using the business valuation, you can now identify the gap between the current status and what you want to achieve. Since you know what your goal is, you can manage and plan how to achieve those. It can also give a clear direction for the management and staff of what’s needs to be done and be accountable in achieving those targets.

• Attracting More Investors

You may want to attract investors to put additional funds into your business. These investors would like to evaluate your business valuation report.  They would also want to know how their investment provides value and return for their money. Investors will likely be attracted to invest if they are convinced that their investment will bring the company to expand its scope and provide more returns.

Discussed above are the importance of business valuation, which can set direction and a critical component in directing the company towards achieving its goal. The business valuation should be done regularly. It can use different methods that are most suited to the type of business operation. eFinancialModels have available financial model templates that you can use for the business valuation to save time preparing it on your own.