6 Elements in a Business Valuation
Oct 11 2023 0

6 Elements in a Business Valuation

If you are on the selling side or the buying side when it comes to offloading or acquiring a business one of the very basic first steps is to get a proper valuation of the company. For sellers, this helps determine what their business is worth and what they could potentially get for it. For buyers, a business valuation helps them determine if they can afford a business and how to angle themselves for the best price that a seller may accept. 

A business valuation is not a concrete number that gives an exact selling price but, instead, provides more information and a general idea of what its monetary worth may be. Getting a proper and accurate valuation benefits buyers and sellers and can be the foundation of beginning negotiations.

If you are selling a business or looking to buy one in California, you must know what the business is worth and if it would be a wise investment. A California business attorney at Leiva Law Firm can help you throughout the entire process from start to finish concerning purchasing or selling a company.

What Goes Into Determining the Value of a Business?

6 Elements in a Business ValuationThere are several factors that are used when determining what the value of a business is. It is imperative to engage in due diligence when selling or purchasing a business to protect your best interests. Every step in the process, including getting a business valuation, should be done thoughtfully and with accuracy. 

The following describes those elements that are scrutinized during a business valuation.

Determine The Current Market Value

Assess valuable tangible assets a company has. In other words, does the business have employees, inventory, or other physical assets that would come with a sale?

Determine Profitability

Look at earnings over time to see if there is a general upward trend in profits. A business that has not shown an increase in profits over time or worse, has notable periods of time where earnings have declined may not be a good investment. Though, in some instances, where deficits are seen, there could be plausible reasons to explain these pitfalls. Here too, it is important to research the market in the industry the business operates to see if there is a projected and expected future return on investment.

Determine Debt

Do the debts and financial obligations a business owes outweigh the earnings it can deliver? Or is the debt-to-asset ratio fair and reasonable?

Determine Brand and Reputation

Does the business have name recognition and is the general feedback and opinion of the company positive? Is the brand clear and strong or will it need to be worked on and adjusted?

Determine Capital Structure

How easy or difficult is it for a company to raise capital or obtain financing?

Determine the Management Group

How is the management group operated and organized? Who is a part of the management group?

Speak to an Attorney at the Leiva Law

Careful consideration of all of the facts that can impact the success of a business must be looked into when doing a business valuation.

Please call the Leiva Law Firm today at (818) 519-4465 to set up an initial complimentary consultation if you would like assistance buying or selling a business in California.

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