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Business Valuation is Critical
What is Business Valuation?
Aspects of Valuing a Business
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
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
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
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.
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