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June 28, 2022

Itax Software

Income Tax Software

Importance of business valuation for companies


Importance of business valuation for companies

Importance of business valuation for companies
business valuation of the company

There’s a question every business owner should ask themselves. “What is your company worth in the open market?”

  • Business appraisal is essential to know about the true value or fair value of your company as it helps in understanding what is your position? And where do you stand in terms of value, growth and business perspective. This is important for funding activities that include applying for loans, mergers and acquisitions (M&A), selling their business and meeting regulatory requirements for voluntary purposes.
  • As there is a lack of trust in global markets and rapid globalization there is increasing awareness for the importance of independent assessment as it has opened up both scope and challenges for businesses. Business valuation is growing but at the same time, it is challenging due to its complexities as it depends on various factors like market, management, capital, objectives etc.
  • To keep it short: Business valuation is an exercise done under the guidance of an expert to estimate the ‘economic value’ of a business. It is determined by business owners with an unbiased view of their business existence in the market or where it is going to survive in the future, business valuation is determined by consideration of companies’ business models, factual evidence, and many more. Is. more external factors.

Key Facts:

  • valuation is a hybrid of art And science (Here ‘art’ is professional judgment and ‘science’ refers to statistics) Because it depends on two things value and value, which differ with respect to the person, time and purpose behind the evaluation.
  • What we understand about business valuation is that it is beneficial to us not only in acquiring or selling your business, but it also plays an important role during problems related to natural calamities, disability, divorce, death and tax. Also solves issues.
  • Gifting or donating company shares for any charitable contribution, settling a shareholder dispute, or turning into an S-corporation, whether you are planning a partnership, or preparing a shareholder agreement, business valuation The needs are endless.

We’ve compiled a list of reasons why you should get a business appraisal,

  • Change of ownership due to retirement or succession to heir.
  • Gifting shares of the business to his heirs.
  • merger with another entity
  • New shareholders are added on a regular basis.
  • Merger of businesses with another entity
  • Valuation becomes difficult as the capital investment of the business increases.
  • Benefits of Takeover (ESOP) Employee Stock Ownership Plans
  • divorce filing.

Professional appraisal helps you move in the desired direction

  • Professional appraisal helps you move in the desired direction
  • Business owners face a lot of difficulties and may feel lost at some point, but at that particular moment, a critical business appraisal will give a clear idea of ​​the company’s problem and where you need to go to increase their financial value. will require improvement.
  • Business owners have no idea about how to improve their results at the same time when they do business valuations. An adequate business appraisal can help show you what areas need improvement, it is useful for making strategic decisions to grow your business and helpful for companies of different sizes as it reflects your ownership and business value. Offers specific value of .

There are a few things you should keep in mind when it comes to business valuation.

Market value of fairs

The price at which the property changes hands between the willing buyers and the seller, and there is no pressure on the people involved in the deals to sell or buy the property and have their own reasons for making the deal.

Generally, it is used for different situations:

  • To transfer the inheritance to his heirs.
  • Income Tax Department and many more such transactions.
  • Selling a business in the open market or auction.

Another purpose of business valuation is to help negotiate a price between buyer and seller who have full knowledge of the facts. To obtain the most corrective fair market value, a company needs to prepare an analysis of business tax returns for 5 years, conduct employee evaluations and set average or weighted average values ​​with various valuation approaches.

book value-

  • The book value is the same as the assets on the balance sheet without considering the liabilities. It would be better to understand with an example that if your company has net assets of $50 million, and liabilities are $40 million, then your company’s books will be $10 million. A secondary approach to valuation that tests the valuation of a company with significant assets such as inventory, receivables, equipment or assets.

Methods of Assessment-

  • If a company has expensive assets and low profits it is very difficult to accurately indicate the fair market value of your business valuation.
  • When completing an appraisal, three business evaluation methods are generally considered. In addition, depending on your business model, you can use a variety of business valuation approaches. To arrive at a value conclusion, the appraiser can employ only one approach.

=> There are basically three main approaches to business evaluation:

  1. Asset-Based Approach (NAV): Valuation of intangible assets that a business has. It cannot be recognized as an accurate indication of fair business value. Net asset value (NAV) is considered practical for companies that have matured or declined in growth cycles, including investment and property companies.
  2. Income Based Approach: The value of future earnings or cash flows is given to the business with the help of present value. This is possible by projecting the business’s earnings and adjusting for changes in taxes, cost structure, growth rate and so on. This method is commonly used in value-based companies like engineering and healthcare companies etc.
  3. Market Based Approach: If the valuation of a company is found by comparing the subject, asset or company on the basis of selling similar types of assets. This is important at a time when there is a lot of data available on comparable transactions. This method of approach is relatively easy in publicly traded stocks or residential real estate.

Business Valuation – India’s Perspective

  • Business valuation plays a major role in dispute resolution in mergers and acquisitions (M&A) as it involves an element of subjectivity that is often challenged.
  • There are not many regulatory set standards for private and unlisted companies in the practice of valuation. Hence in these types of companies, there is a lack of uniformity regarding valuation and valuation is a universally accepted practice in many cases. There are many problems like limited judicial guidance, absence of strict action, and no statutory board to regulate the evaluation process.

Bottom-line!

  • The main objective of a business appraisal is to find the most important value-producing areas of your business. You just need to focus on the important value-creating areas of your business to increase your value. Each important area of ​​the business can be given more attention to increase its value and generate more revenue.
  • There should be different mindset and business intentions which are the key points for any final deal of the company. Business appraisal not only allows identification but also helps in sorting out all possible problems for future deal negotiation.



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