Why is a Company Valuation Important?

Why is a Company Valuation Important?

It is time to materialize all the work you have done for an entire lifetime. How can you prove that is the right moment? The most important instrument to figure out this doubt is the company valuation.

Before explaining the reason why the valuation of a company is necessary inside a M&A process, it is important that you understand what it means. A company valuation, regardless the method you choose, is a process where the actual elements of the company are measured, as well as its competitive position within its sector and its future financial expectations.

Through this analysis, the elements that create value will be determined and it will be possible to specify a value range for the company. The value range will be an informed opinion of what the company in question could be worth.

Why The Valuation of a Company is Necessary

The valuation of a company is a technical work. In order to value a company properly, an extensive financial knowledge is required. Simultaneously, you should first know in depth the company’s business model, the corporate strategy, and the market where they play in. And last, but not least, the factors that create value to the company. Looking beyond the traditional numerical due diligence parameters allows buyers to best calculate the true value of a company to them and sellers to justify a higher asking price. If you are interested in learning more about factors crucial to a company’s sustained success and value, have a look at “THE VALUE OF NOTHING – HOW TO ACCURATELY CALCULATE A COMPANY’S VALUE”.

A company valuation is not an auditory, the analyst doesn’t question the given finances; nor is it an exhaustive diagnostic of all the company’s areas. From the beginning, the valuator will focus on critical areas that will show where the company’s value lies.

Sometimes, when I indicate a company’s intrinsic value range to the owner says: “for me it is more worthy”.

The above sentence holds a very deep meaning. For the owner, very often the founder of a company, who has dedicated his entire life to it, his company is ‘like a son’ and he generally has exaggerated expectations about its value. Because of this, I recommend that if you are the seller, you should put yourself in the shoes of the buyer; the buyer will see things in a different way and his first thought will be: “If I pay all of this for a company, how am I going to earn money?

A Strict Company Valuation Gives You Elements to Raise a Good Negotiation

It is very important to understand that the company valuation is an uncertain science, but if you want to sell your company it is essential to make a careful and strict valuation that gives you elements to raise a good negotiation with your potential buyers. Don’t get comfortable because the buyers will make their valuation too, so they can see how much money they are willing to pay for the company.

The final goal of a valuation is going to condition the methods you will prefer to use. The valuation method used will change depending on the recipient. The buyer is always going to use a method to demonstrate that the value of your company is lower, and the seller will use the method that shows that the value is higher.

When you value to negotiate this kind of transaction, any method is valid, as long as it sustains a rational negotiation. It is essential to value your company because it is your principal tool for the sale of your company.

 

If you consider the sale of your company, as well as correctly valuing your business, you will have to go through different stages to help you maximize the final price. Do you know which ones they are? Download the eBook “HOW TO MAXIMIZE THE PRICE OF YOUR COMPANY” where, in a simple way, we explain how to prepare the company for sale.

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