Why Should you Evaluate your Business ?
An entrepreneur starts a business. At first he/she is able to handle all the tasks, but the company is growing and there is a need to put another person on the team. Due to the high cash requirement of the business, instead of hiring someone, he/she decides to bring a new partner. When it comes to defining investments and equity participation, both ask: How much is the company worth ?
Many people have already experienced this situation, both as an entrepreneur and as an investor. In most cases, opinion-based negotiation is conducted until a middle ground is found. The question is: could anything have been done better?
Yes. The answer is a business valuation with our consultants. In other words, business valuation is the science that serves to give companies fair market value. Although it is a study that can become quite complex in its mathematical basis, its premise is quite simple.
In other words, how much will it generate for profit, or positive cash flow, throughout its existence? It seems complex and philosophical, but there are several techniques to perform an evaluation work. We will talk about it below.
Business valuations are required in the following cases:
- Private equity
- Preparation for a transmission
- Capital increase.
Assessment methods and consultants:
There is an overview of assessment methods which are summarised into three categories:
- Asset methods: consist in evaluating the patrimonial value of a company on the basis of the most recent accounting balance sheet of the company, it is necessary to include all the items of the Assets and Liabilities, analyse them, and make the necessary corrections in order to have the most reliable image of the economic reality of the balance sheet.
- Comparative methods or profitability ratios: a company may be considered as profitable on the basis of multiple results such as net income, operating income, gross margin, and so on.
- ROI-based business valuation methods: the value of the company is equal to the sum of the expected cash flows that could be generated in the coming years.
Which method? For which company?
If the applied method is structured in a solid way and with a precise focus on a unique and clear result, little changes of the place of application can occur.
The differences in the context of organizations do not stop at the size and type of business: there are companies for which it is necessary to activate a new process of assessing skills. However, other companies have a system for the evaluation of the competences that is present and consolidated, with its benefits and its critical issues.
Despite the differences of companies and their needs, there is a common objective which is to achieve better results such as developing your employees’ skills thanks to a clear focus on actions, behaviors, and habits that guide the actions in the company.
OAC's role in business valuation:
OAC intervenes through the following steps:
- Diagnosis of the company and its environment,
- Selection of the most appropriate assessment method(s),
- Financial extrapolation,
- Determination of a value range.