What is a business valuation ?

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. 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.


Why is evaluation important ?

Evaluation is a set of techniques used in various aspects of the economy and business management. For instance, if a stock is cheaper than the business valuation, it is interesting to buy it.

Another common use is the IPO (initial Public Offering) of large firms. This is the time when they open the capital and need to set the stock price to make an initial offer on the market. If the price is inconsistent with the valuation, there is a high risk that the IPO is a failure.

In fact, business valuation is increasingly used by small businesses. The aim is to make arrangements between directors, partners, and investors more equitable and to facilitate negotiations.

We are observing the emergence and growth of several startups. They are companies, usually technological, created to achieve a rapid growth through maintaining bureaucratic structures. Entrepreneurs need to deepen their assessment. Startups are subject to different stages of fundraising before they become profitable and errors in evaluating companies are often disastrous.

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.

The best auditing and consulting company : OAC

OAC is an outsourcing, auditing, and consulting company that focuses on integrated solutions for its clients.

We guide entrepreneurs and managers in the development of their companies and make them independent in maintaining and improving the results that are suggested by our consultants.