Running a successful business means having access to all of the facts. One of the frequently asked questions is, what determines the value of a business? There are many different factors that need to be taken into consideration with the valuation of a business. These factors need to be taken into consideration in order to discover the true value of your business.
Purchasing a business is only the first step that is taken into consideration. Unfortunately, what you paid to purchase the business may not actually be its actual value. The following is taken into consideration:
- Future performance
- Financial leverage
- Financial Return Expectation
- Cash Flow, not profits
- Deal Structure
- Asset type
- Exit strategy
When a valuation is being conducted on your business the valuator will look at all of these aspects. One of the biggest ones that is taken into consideration is in fact the future performance. The reality is, that you need to make your business functional for the rest of the time you own it. Even if your business bought in millions in the past, this will not be taken into consideration during the valuation. Instead the valuator will look at the history of the business only to help determine how it might progress in the future. Furthermore the future performance will also take into consideration the current condition of the business as well as what a future potential buyer could do with the business were you to sell. This is why it is extremely important to get a valuation done to give you an accurate assessment on how your business should be performing.
As your business is being evaluated as a whole, it is important to make sure that every aspect is at its best. During the valuation, every single “asset” will be assessed. This will include any machinery you might use, the condition of any buildings you have and also the area that you are located in. Unfortunately, the area that the business is situated in can devalue the business. When deciding to purchase a new business, look at the area you are buying it in. Try to pick an area that is either considered to be a safe and good area, or an area that is up and coming. This could help you in the future value.
Why is it necessary to do a valuation?
Now that you know what will determine the value of the business, you could be asking yourself why it is necessary to do a valuation. The short answer is that it will make you aware of exactly what your business is worth. The long answer is that it can assist you in other important areas. This will include:
- Loans
- Tax
- Sale of the business
Getting a valuation done needs to be handled professionally. Here at The Property Partnership we can provide you with a fully comprehensive service. We will help put things into perspective for you. For more information on our services visit our website www.property-partnership.co.za.