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Exit or Expansion: Why Business Value Is Vital In Making a Decision

By Analytix Editorial Team

September 2, 2014 0 Comments

Whether it is about exiting a business or expanding it, business valuation is central to the process of buying or selling. A valuation process can help you eventually decide whether it is a good idea to expand in newer directions or to exit the business altogether.

A realistic valuation

An appraisal based on current markets can help provide a realistic valuation of your business. Any valuation above or below the market rates may lead to negative associations with the company.

A negative association can be harmful if it hinders the business’ future prospects and makes it look less attractive for a sale because ultimately, a  successful startup owner may want to sell out and move on to the next big idea or pursue another line of interest.  The main criteria to exit include:

  • Current and future valuations
  • Arriving at the right price

Ideally, you should seek the help of an expert if you need to get your business valuation done. Accuracy and reliability are two necessities for this time-consuming process.

Different processes exist, each with an individual formula. More importantly, the variables that go into a valuation can be too many. Broadly, though, business valuation can comprise of the following groups:

  • Taking into account business assets, including book value and liquidation value
  • Historical earnings, such as debt repaying ability, dividend-paying ability, and capitalization of earnings, etc.
  • Future earnings, such as future cash flow
  • Combined assets and earnings, or the excess earnings method

In either of these methods, factors like hard assets, owner’s equity, saleable parts within the business, etc. are taken into account. This means that your accounts and bookkeeping should be faultless and up-to-date.

If poorly handled, accounting tools can misguide the management team into thinking that a company is doing very well, when in reality it may not be.

Exit or expand?

Because a valuation formula scrutinizes business financials and underlying elements, like cash flow and income and expense, a business valuation can help point towards challenges encountered by the business.  A valuation can also guide owners/shareholders whether they need to steer the business into a different direction or need to make a timely exit to stem critical losses.

However, if you believed that a valuation is essential only till the time of an actual sale or purchase, you would be mistaken. Valuation can have large-scale repercussions, including influencing key business decisions.

Why conduct a business valuation for business decisions?

Though business valuations are often associated with sales, acquisitions and mergers, this is not always the case. A business valuation is integral to decisions pertaining to investment in the business, whether it is for the shareholders or for the business owners involved in everyday operations. Apart from business planning and other critical operational decisions, business valuation enables:

  • Arriving at your tax obligations
  • Resolving a litigation or potential litigation
  • Raising funds
  • Resolving any disputes

Analytix Solutions can assist companies in accounting and bookkeeping and accurate valuations. For more information on our services, please visit us at http://www.analytixaccounting.com or email us at [email protected].

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