What is business valuation and is it necessary to do valuation of a business?

Business valuation is the process of finding the economic value of a business at the present moment. Usually, for small businesses, the valuation of the business is the final amount in the balance sheet or ledger book. For medium to large sized businesses, the value of the business is the value of total equity shares on that day.
But these terms are not taken into account when determining the value of the business for various purposes like selling the business, when sharing the profits with the partner or when the business needs to be divided during any litigations or divorce proceedings.
Finding the value of a business is not a simple thing and it cannot be determined based on a single factor. There are many factors which have to be taken into account when finding the value of a business. So it is always better to hire a professional or team of professionals to find the value of a business.
What do business valuation experts do is the question that arises. The business valuation experts find the value of the business based on the proper approach which is beneficial for both buyers and sellers of the business. Also, the business valuation experts determine the value of a business based on the factors whether the business will be continued or not.

There are three ways to find the value of a business:

  • Market value.

  • Based on the assets.

  • Based on the returns or income of the business.

The valuation of a business on the market value is done by comparing it to value of the similar businesses. However, this method may not give good results as the value of businesses are not stored accurately or available for the public to check. Another issue with this method is that the value of a business can go up or come down based on the negotiations.
Asset-based business valuation is more solid compared to the market-based valuation. This is the value of total equities of the business minus the liabilities. This method is followed to find the value of a business when there are plans to continue the business. Another approach is followed when the business is going to be terminated and the assets are being sold. Here the value of the business will be lower comparatively.
If the business valuation is for the sake of investors to invest in their business, then the value of the business is in terms of the returns or the income on the investment.
Please feel free to contact sales@siddhiconsulting.in for further queries or inquiries related to business valuation.