Business Valuation is Critical

What is Business Valuation?
The term business valuation is the method by which the business worth is determined. This usually happens when the business is for sale, when the business is looking for extra funding from the banks, when the business is considering taking on extra investors, or where the business is looking at merging with another organisation.

Aspects of Valuing a Business
A business is worth whatever someone else is prepared to pay for it and therefore its value will vary from person to person. There are many ways to value a business and the final price will differ, depending on the method used.

When the business is for sale, the price the seller wants is usually never the price received. This is because the seller's perception of the value is usually much higher than the buyer's. The final price is usually in between because the buyer and seller will negotiate an agreed figure.

Value against Ability to Make a Profit
When purchasing a business, obtain professional advice regarding the valuation. You need to be happy that you are not paying more than what you believe it is worth. If you pay too much and encounter financial problems later on, your capital reserves will diminish very quickly, because the business will not perform to the level indicated by the seller.

In general, a business should be valued against the ability it has for making profits. Other factors, such as the ability to generate good cash flows, or the consistency of profits, or a potential for growth and the lack of competitors, will have an effect on the price. Because each business is unique, it is important to use the most appropriate valuation method that does justice to the particular business and it's potential.

Finding True Worth of the Business
If you are buying a business it is important to calculate the true worth of the business on offer. This can be a problem for a prospective buyer. It is for this reason that the buyer should seek professional advice, both from a business valuer or accountant, as well as from a business broker who deals in the type of business offered by the seller.

From the buyer's point of view, buying a business is an investment decision and, as with any other investment decision, the net worth or value will be based upon the ability of the business to provide returns.

These returns are represented by the profits the business makes, so the value of available profits will have a bearing on the net worth (or price) finally agreed to by both parties. An area that requires special attention is goodwill.

Goodwill has many definitions, but one of the simpler explanations for goodwill is; it assumes that because the business has been running with an established clientele or customer base for some time, the clientele or customer base will keep coming to the business for their requirements, thus creating a value known as goodwill.

Price based on Asset Values
When a business is put on the market to be sold, the owner (seller) will ask for a price based on the asset value, plus its ability to generate profits for the potential new owner. Assets could mean; plant and equipment, stocks, branding, trademarks and licences etc. owned by the business. Valuing assets is fairly easy. However, arriving at the true value of the assets is not always straightforward.

For example, the assets would be valued in the books of the business at a different valuation than in the current market. Some assets (such as computers), may be in the business books at $4,000 being the original cost less depreciation, and yet because of the advancement in technology, that same computer could now be worth half that.

A potential owner will therefore only be prepared to pay market value, rather than the original cost, less depreciation. Another intangible asset valued is known as goodwill, (already explained above). Also, another asset, (which can be termed intangible) is intellectual property.

Intellectual property relates to the patents, trademark and other trade secrets and designs, which are owned by the business. Because they are unique to the business they have value.

Copyright 2005 StartRunGrow
http://www.startrungrow.com

StartRunGrow (http://www.startrungrow.com) is a global online information organization that specializes in creating, developing and marketing business help information specifically with the aim of "making business easier" for entrepreneurs around the world. The StartRunGrow objective is to become a dominant player in the business help arena providing end to end solutions for the millions of small and medium businesses worldwide who continue to struggle daily with the difficulties of starting, running and growing a successful business.

---

Boston Suburban areas a good choice to run a business

BioTechs even with the latest news had shed over 1000... Read More

How Is the LEGAL SYSTEM Dishing Out JUSTICE in Your Town?

Thankfully, most of us will never find out. That is... Read More

Small Business No How - Dont Give Away the Farm

You're pretty proud of yourself! After all, only four months... Read More

Small Business Strategies - Four Critical Success Factors

Scenario OneDuring a recent presentation, a business owner was given... Read More

Provide Affordable Health Care To Employees At Little To No Cost To You

You can provide affordable health care plans to your employees.... Read More

Do You Love Food? - Then Maybe Opening a Restaurant is Not Such a Crazy Idea

The restaurant industry in the United States employs an estimated... Read More

Two Types Of Business Plan Cover Pages ? Which One Are You Using?

This is the tale of two business plans with very... Read More

Mobile Carwash; Senior Citizens and Mobile Homes

Senior citizens are generally not a large marketing segment for... Read More

The Wrap on Ag Plastic

While driving through Pennsylvania farmland, you have probably noticed an... Read More

How to Effectively Design Your Business Image

In many industries, image is one of the last things... Read More

Nevada Incorporation: The Advantages of Incorporating in Nevada

Incorporation in Nevada has become an attractive option for savvy... Read More

Tell Me The Reasons Why I Should Believe You?

Have you ever heard the phrase, 'PREPONDERANCE OF PROOF'?I recently... Read More

Money Series 1: Who Takes Your Money

Your business is making profits, but where is the cash?... Read More

Getting City Contracts; Local Government Contracting

All cities have a purchasing office and/or a procurement officer.... Read More

Is Your Business Making Money?

Is your business making money? Would you know?Figuring out whether... Read More

Are You Making the Most of Your Intern?

KEEPING INTEREST HIGH: Supervision is key to the success of... Read More

A Look at Small Business Incorporating in Florida

The choice to incorporate a small business in Florida has... Read More

Mini-Blind Cleaning Business, Case Study

Sometimes the simple businesses are the ones, which make good... Read More

Corporate Shells

A corporate shell could be liken to a house that... Read More

What Help is there for Veterans Starting a Business?

Some of the very qualities that attract people to the... Read More

How to Use Graphs and Charts in Your Business Plan

Many people ask how many graphs or charts they should... Read More

Credit Repair Business Opportunities - Huge Profit Potential!

In the world today, many people are further in debt... Read More

Top 10 Mistakes to Avoid When Joining a Professional Association

I'll be the first to admit that I went a... Read More

Finding a Venture Capital Firm

Many ventures are faced with the challenging task of raising... Read More

Your Ideal Client ? A Key Concept for Solo and Small Business Marketing

"I don't know the key to success, but the key... Read More

Small Business and Over Regulation

Over regulation of small business is so intense it is... Read More

Boy oh Boy, The Obstructions and Obstacles

The bad things starts with the letter 'O'?.like Obstacles, Obstruction,... Read More

Starting a Small Business? ?Tips from a Veteran

Congratulations, you are starting a small business! You are taking... Read More

Collaborative Negotiating: A Win-Win Strategy

COLLABORATIVE NEGOTIATING:Collaborative negotiating is a win-win strategy that can focus... Read More

The Advisory Board: A Business Owners Most Valuable Resource

As a company grows, the owner's role begins to change.... Read More

Patient Records - Your Responsibilities

As a practise gets larger & larger the associated problems... Read More

Frodos Journey: What It Can Teach You About Marketing Your Small Business

Just recently, I took a break and caught "The Return... Read More

Small Business Failures in America - Cash Flow Issues

We are noticing an increase in the length of time... Read More