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Business Analysis for Business Growth
Business analysis and valuation is key for long term business success
The cornerstone of small business growth and success is information. For your business to grow you need knowledge about your market, your competitors, and most of all your own company.
Some business owners don´t consider analysing their own enterprise because it´s their company and they assume they know everything about its operations and finance. This may be informally true, but savvy business owners know that business analysis and valuation is key when pursuing these strategies:
Selling the company as an ongoing concern
Liquidating the company
Negotiating a buy-sell contract
For insurance and estate planning purposes
To benchmark future growth
To determine company value as loan collateral
Small business owners can use several business valuation methods to arrive at a business valuation. By choosing the appropriate business valuation process, the owner can arrive at an appropriate fair market value (FMV) of the enterprise. The fair market value is defined as what a willing buyer will pay a willing seller when each is fully informed and under no pressure to act.
1. Asset-Based Business Valuation Method
This is the simplest method, and is similar to the way you would put a price on a used car. A company´s value is determined by adding up all of the physical assets of the business, including buildings, factories, vehicles, office equipment, cash, receivables, and inventories.
There are a few complications. You have to take into account depreciation, and deduct any outstanding debts such as business loans. The resulting figure is the net book value. This business valuation process is best applied to manufacturing and retail companies for insurance purposes or liquidation.
2. The Market Method
The asset-based method of business valuation does not include any of the intangible aspects of a business such as goodwill, the value of human capital, the brand strength, or business trends. To arrive at a fair market value for most companies, especially service companies, these intangible elements must be considered.
A market value approach is designed to measure the business as an organic whole, and place it within the universe of competitors and the marketplace. This advanced business valuation method encompasses all of the company´s activities within its chosen market, and assigns a value based on the value of comparable organisations. Elements that contribute to a firm´s market value include:
Value of comparable enterprises
Location
Number of years in business
Breadth and depth of product line
Market share
Number of employees
Asset valuation
Cash flow
Goodwill, or brand penetration into the marketplace
Debt
3. The Income Method
In some cases, investors and owners need to know a company´s bottom line: how much economic benefit the company produces. This business valuation approach requires the use of an earnings formula. The most basic method is to add up the company´s earnings for a number of years in the past. Then the total is divided by the number of years to reach an average value.
To calculate the fair market value of an enterprise, investors and small business owners use the asset-based, market, or income method, or a combination of all three.
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