As the economic climate continues to change — especially in the area of finance — it is becoming more important for you to keep close track of your business’ value. Business values go up and down, and even if you had your business valued only a year ago, it probably won’t have the same value today. Here are four reasons why you may need to conduct a business valuation on your company.
Your Business Is in the Startup Phase
If your business is in the startup phase, you will need to value it to determine how much of it you will have to give to investors in exchange for seed money. For example, if your business has a value of $50,000 and an investor gives you $10,000, it would have a post-investment value of $60,000. Now divide the investment by the post money valuation, and that’s the percentage of your company the investor will own. Keep in mind that because startups typically don’t have a lot of financial value, pre-investment startup valuations are calculated on the business’ growth and potential rather that the current monetary value.
You Provide Quarterly or Annual Updates
If you have an established business and have to report to investors or other stakeholders on a quarterly or annual basis, you can include an updated company valuation as part of the presentation. This will give your stakeholders a clear picture of the financial health of the business, and also provide them with a comprehensible metric that shows them exactly what their investment is currently worth.
With the array of new fundraising options available to small-business owners, it’s important to know the value of your company before you begin. For instance, it is now possible to use crowdfunding to ask nonaccredited investors to buy actual shares in your company as a way to raise funds. But to determine how many shares you will give for a certain investment, you must first assign a value to your business. In addition, if you plan to approach a bank for funding and want to use your business as collateral for the loan, you will also need to determine its value.
You’re Selling Your Business
To determine your company’s fair market value, a business appraiser will need to perform a formal valuation. This is the first step in selling your business, and it will help identify the key areas of value you can use in the negotiations. In addition, the valuation will point out areas of weakness that you can improve on to sell the business for as much as possible.
Keep in mind that whenever you conduct a formal business valuation, it will be assigned a valuation date. In the eyes of the market, your business value will remain the same from that date until another valuation is performed. That could cause problems if you have to quickly sell your business, and only have a valuation that is two years old. Most experts recommend conducting a business valuation at least once a year.
Want to get started? For a simple valuation estimate for your business, use this free business valuation calculator.