Consider the following scenarios:
Stakeholders for a company change
A company wants to sell its business
A startup wants to offer equity as compensation
The commonality in the above scenarios is that they all require the business to be evaluated. New stakeholders will want to know the value of a company. Buying and selling of business can be undertaken only post valuation of its business. Pricing compensation will also be subject to the business’s value. In short, the business valuation of a company does not just offer an advantage; in most cases, it is a prerequisite.
The worth of a business after analysis of its assets and liabilities is what business validation is. It is the responsibility of certified appraisers to conduct such evaluations. It goes without saying that documentation is a crucial part of the process. A detailed analysis of past financial statements, future financial projections, and payroll is necessary. These are the more tangible, quantifiable aspects that are taken into consideration. Qualifying aspects such as the company’s goodwill and trademark are taken into account as well.
The size of the company is not of importance for valuation. Big or small, known or unknown at the time of valuation, what matters is the financials. Tesla, for example, in 2016, had a market capitalization of $50 billion. Apart from this, its balance sheet reflected liabilities of $17.5 billion. The company accounted for $3.5 billion in cash in its accounts, giving Tesla an EV of approximately $64.5 billion. Similarly, smaller businesses may have lesser valuations, which are vital nonetheless.
Given the state of affairs post COVID, it is imperative to take a clear hard look at the state of one’s business. This will ascertain if there is a need to adjust the course in important areas where income and expenditure are concerned. Be it sales, revenue generation, the supply chain, or any other aspect,adjustments may need to be made for a healthy evaluation outcome. The owner of a small business will face the impact of inflation, supply chain delays, especially given the current risky scenario. New concerns never faced before may emerge, too. All this may need tweaking for a favorable outcome.
A strong business valuation will hold the company in good stead. A quality earning report under the belt conducted by a third-party accounting firm will give the company the required recognition. The presence of a legal team will drive the process forward while being a guide to ensure that risks are mitigated. It is crucial to support current management to ensure that they thrive through the process of evaluation. This will help to drive over the danger of price reduction, which can prove to be fatal.
The remaining quarters of the year 2022 are likely to witness a spate of mergers and acquisitions. The natural outcome will be an increase in prices, and to remain on top of things entrepreneurs will work on knowing what is happening in the marketplace. Trends in transactions will further impact reflections of valuation.
Business leaders will have a lot to work on to assess how their valuation will be impacted.
The author is one of the leading investment banking professionals. You may set up a free consultation by emailing at john@kgfinadvisors.com