Why is valuation important for a business acquisition?

On Behalf of Dunlap Fiore, LLC |

As a previous post discussed, mergers & acquisitions are major events that could take place among companies, possibly improving the overall function of a business and even extending the longevity of the company. While many opportunities could present themselves during a merger or acquisition, some businesses in Louisiana and elsewhere might profit more from selling their business. In these transactions, however, it is important to take certain steps, such as valuing the company.

Why is business valuation important when you are selling a business? Business valuation is imperative because it is a method to arrive at the best possible price one could get for selling the business. In order to sell a business, one needs to have an idea of where to set the asking price. There are three basic approaches for business valuation.

The first is the market-based approach. This method looks at other businesses in the same or similar industry that have been sold recently, and bases a sale price on the sale of the other business. This approach is considered risky because it could easily fail to capture the true value of your business.

The second approach is the asset-based approach. This method requires one to look at all the individual assets that make up the business, basing the selling price on the fair market value of all the assets combined.

The third method is the income-based approach. This is the most commonly used approach and focuses on the amount of money a business generates for its owner. Specifically, this method looks at the cash flow of the business, and accounts for any debts owed.

While selling a business might be the best option for a business owner, it is also a major and complex business transaction. Therefore, it is important to go into a sale with all available information and a well-calculated business value. When dealing with this or any similar business law issues, it is important to understand what steps to take to protect your rights and the interests of your business.

Source: Findlaw.com, “Business Valuation Methods for When You’re Ready to Sell,” accessed Oct. 30, 2016