Common Mistakes When Valuing a Company!
The term “valuing a company”, seems to be overlooked by many business owners, as they seem to think it only relates to the money the company seems to make, this couldn’t be further from the truth! with many factors involved and needing to be considered when valuing a company, it’s important to have a clear understanding of what is involved and how an accurate business valuation is an essential tool to have for your business success.
Below are few key points to give you a better understanding of what to look for in a valuation company, like us!
Based on earnings
the first mistake as a business owner is not knowing the worth of your business. with this type of approach, there is the potential that you are neglecting cash and non-operating assets, for e.g. the value of real estate/ intellectual property which is owned by the company itself.
To avoid making this mistake, compare to other companies in the industry, to see their average ratio of earnings to assets. if your company has a lower than average ratio this may suggest you’re not as profitable as your competitors, this may all come down to accounting errors and vice-versa.
Market Fluctuations Accountability
In today’s market, it’s always changing, and fluctuating can be a business owner’s most common mistake which they can overlook at times. to avoid forgetting these market changes when valuing your company, it’s important that you factor in the capital every time.
to calculate the cost of equity it’s a measure of how expensive it would be to lend money from investors. whereas the cost of debt is measured by banks and how much they will charge on certain loans used for your company. this is then used as induction of future borrowing rates and what it all entails.
Company assets = Book values of assets
many may assume that the book value of their company assets will equal to its current market value, and this is another common mistake made by owners. As a business owner, it takes looking into the amount of revenue generated as well as estimating fair price margins to work effectively.
Considering all your internal factors there are external factors that play a role as well: depending on your business and the industry you fall under.
- Government regulations
Intangible factors like brand equity and customer loyalty are ignored by most owners Although it can be difficult to calculate these factors, to ensure an accurate valuation for your business you still need to consider these factors.
some examples of intangible assets include goodwill or the reputation of the products/ service you offer. you can also include any patents/trademarks which the company has obtained which allows you to operate your business more effectively and efficiently than competitors in the market.
Customer loyalty is one of the key factors for any business’s success. and this comes down to the continuation of purchasing from your customers and the business relationship with its customers even in an economic downturn.
Ignoring Potential Risks
Lastly, ignoring any potential risks such as changes in regulations or competition may have a negative effect on your business. knowing how your product/service will be impacted by these changes, if not taken seriously these risks may have implications on the value of your business.
Keep in mind that external factors no matter the entity there will be an impact on your business and its value. Take into account every possibility whether positive or negative especially when you have a business valuation completed.
although when valuing a company is no easy task, having a team that is specialized in all-business related requirements, ensures a valuation report that is detailed and helps in all informal decision making with regards to the future potential and success of your business. at the end of the day, this will be one of the biggest assets you will own
Valuing a company is no easy task but our team are specialized in all business-related purposes and can guarantee a valuation report that is detailed and helps you in any decisions you may have regarding the future potential and success of your business, at the end of the day it’s one of your biggest assets and you want to know you’re on the right track.
Tyla Wood is an expert in valuations services for a range of property types. With over 20 years of experience completing valuations across residential, commercial, and industrial properties, Tyla has taken part in multiple large-scale valuations for various government agencies. Tyla often speaks at local career seminars for both TAFE and tertiary courses and enjoys engaging with her peers and clients in regard to her local market knowledge within the Perth metropolitan area.
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