DIFFICULTIES IN VALUING A BUSINESS
Valuing a business can be one of the most challenging issues faced by business owners and analysts alike. Valuing is a difficult and incredibly complex task, but one that is utterly essential. On occasion, traditional modes of valuation simply do not suit the business type. These techniques often assume a certain level of stability and an imagined risk profile which may not be applicable, and without being adapted, this can result in critical errors in valuation.
In the early stages of your business it can often be a struggle to value the business in an accurate way. This is also often a stage in which it can be difficult to predict the risks associated with the business. In this instance three things must be predicted which can be challenging to do in changing financial times: how will the market you are entering grow and change? What is the likelihood of your business surviving and what risks will be associated with the venture in the longer term?
Analysts can often be more concerned with the general economic growth, rather than the growth of the individual company and this may be something you will have to take into account in your own calculations. For ease: we have collected some of the most common forgotten issues that may become a problem in your valuation and risk assessment, in the hope that you may be able to avoid these pitfalls.
Originality/Diversity: A good thing to bear in mind when valuing your business is that businesses which offer an original/single product or service are subject to a higher risk level than those which offer a well-known or a great many products and services.
Clientele: It is important to take into account your current and projected clientele when valuing and assessing your business. For example, if your business is one which has relatively few clients, then your risk factors will be much higher as the results of losing one of your clients will be much more detrimental to your business than one which has a wide range of clients.
Projected Lifespan: Your Company’s projected lifespan is often difficult to assess but it is important to take into account the changing business world you are entering and whether or not it is likely that your product or service may soon become outdated.
Location: Location is not only a factor in setting up your business, but also in valuing it and assessing its growth capabilities for the future.
Assets/Liabilities: When valuing your business it can be easy to forget to factor in current and projected assets and liabilities. When included, these can paint a more in depth picture of the current and projected value of your company.
Expectations: It is vital to remember that valuations are essentially expectations by nature, and they can be used as a blueprint for the planning and maintenance of your business.
There are always unforeseen circumstances both negative and positive that will affect your business and these cannot be predicted. As such, your valuation is a blueprint for you to build upon rather than a strict prediction.
If there is any way at all we can be of benefit to you in the start-up, maintenance or valuation of your business please don’t hesitate to contact us at DCA Accountants.