Due to the highly competitive business market, business valuation can prove to be a challenge for most businesses, especially small ones. Many startups consider business valuation daunting since they do not have a set business model and are unaware of the correct strategies to perform this task. It all starts with knowing what business valuation is. Put simply, it is the procedure of evaluating the value of a specific business. There are plenty of methods that people can use to do so.
This includes assessing the income, business model, asset value, considering the external environment, etc. Business valuation is very important for small businesses for a variety of reasons. However, it is likely that, as a small business owner, you will face a few challenges during the process. Overcoming them will be easier if you are aware of them. Here are some common valuation challenges for small business owners.
1. Picking the Right Valuation Method
You might be aware that there are a few options when it comes to valuation. Not all of them are best for every situation. The income-based ones estimate the current value of the company’s future cash flows. The market-based ones compare the company to the similar ones that were sold. Asset-based ones estimate a particular business’s net worth by subtracting the liabilities from the assets. All these methods have a few pros and cons.
Income-based valuation methods are not the right choice for small businesses with negative or no cash flows. Market-based valuation methods fail to show a company’s unique characteristics, while asset-based valuation methods tend to overlook things like intangible assets and goodwill. Hence, it is essential to pick the valuation method that best shows your business’s potential.
2. Difficulty Valuing Intangible Assets and Goodwill
In simple terms, intangible assets are non-physical assets that have value for the company. This includes customer lists, licenses, contracts, trademarks, patents, reputation, etc. On the flip side, goodwill is a business’s excess value over its tangible assets and recognisable intangible assets.
In most cases, intangible assets and goodwill are tough to measure and value because they depend on numerous factors, including industry trends, market conditions, competitive advantage, and customer loyalty. It is worth noting that they can have a substantial impact on the business valuation. Hence, you should look to find out and quantify the goodwill as well as intangible assets of your business.
3. Dealing with the Valuation Uncertainty
It is a fact that valuation involves estimation, judgment, and projection. It is true that valuation is subject to uncertainty thanks to things like availability as well as the quality of information utilised, the assumptions made for the valuation, and changes in the external environment that affect the valuation. Such factors have the ability to make a business’s valuation vary a lot. You can use multiple valuation methods and update and revise the valuation occasionally. You should communicate as well as negotiate the business valuation transparently. It is better to hire the best business valuation experts and consultants in Australia for the valuation.
Wrapping Up
Incorrect business valuation will not only waste your precious time but also rob you of the money you deserve. This is where it is important to understand the common challenges such as the ones mentioned in this article and overcome them.
