A business valuation is a document that estimates the economic value of an owner’s interest in a business. To value is to professionally estimate what the business is worth, considering its assets and liabilities. For the purposes of buying or selling a business, valuations are normally done on the either the assets or value of the stock, depending on whether the purchase it an “asset purchase” or a “stock purchase”. When valuing a business, one must consider both the tangible assets (such as the land, building, inventory, furniture, fixtures, and accounts receivable) and the intangible assets (such as the business’ name, patents, trademarks and goodwill). When buying or selling a business, a valuation establishes a basis begin meaningful discussions. It allows sellers a method to justify the asking price. It provides buyers a third party professional’s estimate as to the value of the business. For both, it makes financing and/or loans prospects much more secure.
In addition to merger and acquisition (buying and selling) purposes, and assistance in allocating the purchase price among the business’ assets, a business valuation is also useful for many other purposes. Business owners often maintain an up-to-date valuation to assisting them in tax determinations, insurance matters, inheritance issues (such as wills, estates and gifts), divorce litigation, and to help establish the value of partners’ ownership interests when doing buyouts or buy-sell agreements.
A business valuation should be a vital part of every business. It not only assists in the buying and selling process, and as outlined above, but also provides a very good methodology for determine year after year if a business is increasing or decreasing in value – thus assisting in the timing of any sale.
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