How Do Investors Determine the Value of Your Business?
Businesses require money for their day-to-day and long-term operations. Retained earnings and bank balances are often not sufficient to achieve business goals. In such cases, businesses require investment from third parties. These parties have funds to invest in return for a fixed profit. They are called investors.
But why do investors invest in a company? How do they decide how much to invest and whether it will be worthwhile if they invest?
Business valuation is an important process that helps investors determine the value of a business.
What Consists of a Business Valuation?
Business valuation is assessing your company’s true worth and whether it promises sustainable growth for the foreseeable future by assessing potential growth.
Investors invest in a business on the pretext that they will earn from it. So, if a business has the potential to give them desired returns, they invest.
How do Investors Determine the Value of a Business?
Investors use business valuation methods to determine the value of your business. Do they value your business themselves? No. Business valuers are certified professionals who carry out business valuations. You must consult a professional for business valuation in Orange County whether you are an investor or a business person who requires investment.
There are several methods of business valuation, such as
Discounted Cash Flow Analysis
This method is best suited for companies with past financial records, i.e., operating for a few years. Records help estimate future financials. The expected future cash flows are then discounted to present value. It derives the value as how much the future earnings of the company value today, and based on it, the company valuation is calculated.
Net Asset Method
The net asset method is not suitable for business valuation, but if you are a businessman who needs a quick assessment of your business, it can be used. It is very simple. The total of all liabilities is deducted from the total of all assets. Then, the net asset calculated is assumed to be the business’s worth.
This method is not popular because it does not offer the true value of a business.
The liquidation value method works on how much value a business can garner if it is discontinued today. All the assets and liabilities are valued at a price that they can fetch in case the company is liquidated today. In the case of liquidation, the assets are salvaged at lower values. Creditors also waive a portion of liabilities after realizing how much the company can pay. The proceeds of the assets are used to discharge liabilities.
The market value method uses comparable facts to assess a company’s worth.
This method searches similar companies based on their size, financial statistics, and growth parameters. Then, required adjustments are made, and the sale value is used to determine the underlying company’s worth.
However, finding similar companies in all the required aspects is not easy.
Not all these methods are suitable for all companies. Thus, business valuers understand the stage of the underlying company and its needs and then decide which method will be best suited.
How Non-Financial Factors Play a Role in Business Valuation?
The methods discussed above are used for the financial valuation of the company. But non-financial factors also play a crucial role in business valuation.
It is crucial in the case of startups that there must be a market for the new product or service. Sometimes, the product is too young for the market, and the demography of the market is not ready for it. Sometimes, competitors are rising in the market, making it less appealing and hindering the expected growth. Therefore, business valuers also need to conduct a comprehensive market analysis to predict future growth.
If the company desiring investment is an existing company, its reputation and records are also examined to ascertain whether investors can risk their money. A company’s shareholders’ trust and loyalty help maintain its share prices in the market, and this trust reflects in the form of the increasing share price.
A crucial non-financial factor is hiring a professional for business valuation in Orange County. The more experienced and knowledgeable a business valuer, the more reliable his business valuation report is. Be it investors or businesses, consideration must be given to hiring a professional business valuer.
Investors invest their hard-earned money in businesses; thus, they need to ascertain the true value of a business and whether it is a profitable move to invest in it. Business valuation is the inevitable process that helps them find so.
Hiring a business valuer is the first step toward a future investment plan. Next, you must consult a business valuer for business valuation in Orange County.