Do you know the difference between a formal and an internal business valuation? Do you know when the different types can be used or when they are relevant?
An increasing number of business owners are realizing the necessity of valuing their businesses regardless of their size. All business owners have, at some point, wondered about the value of their business. As long as you own an enterprise, time will come when you will have to either find out its legitimate value or get an expert to advise you on its estimated value. You will need to choose between getting either a formal or informal business valuation. That said, this guide helps you understand what both terms mean and the different times to apply either valuation.
What is an informal business valuation? 1
An informal business valuation refers to the process by which a professional makes an estimate of how much your business is worth. Such a valuation can be conducted by a broad range of experts including lawyers, business brokers, bankers or public accountants. The valuation can be conducted by the use of different criteria. However, most of the methods used to analyze the business’s value focus on your business’s projections of cash flow. A valuation firm can use the following approaches to make an informal valuation:
- The asset approach where a business’s value is measured by analyzing its tangible assets. Most of the time, these assets are usually in the form of inventory or equipment. The firm or professional taking on this valuation then compares the business’s assets using the book and value method.
- The income approach where the valuation firm or professional uses a company’s previous earnings to calculate its value using earning potential. Earning potential is the ability a firm has to earn money by its sale of goods or services. In case your business has consistently strong earnings, then this type of approach for your informal valuation is recommended.
- The market approach which usually values a business based on how much other similar businesses are worth in the market. These firms should have recently been sold, and the documents about their sale should be available to the public. It is mostly used for small businesses.
Informal business valuations are used at times when you need an accurate estimate of your business’s value. It will help you get a better understanding of the financial worth of your business and help you strategize on ways you can increase this value.
What is a formal business valuation? 1, 2
A formal business valuation is an official statement of a business’s worth. That said, this statement can be used in corporate or legal sectors as a registered fact. A formal valuation can be completed by valuation specialists, investment bankers or Certified Practising Accountants. The array of methods used in formal business valuations depends on the professionals called upon to conduct one. However, formal valuations require the review of a lot of financial paperwork and calculations to get the most accurate value of your business.
In case you might want to make a dispute for claims previously made about the value of your business, then a formal valuation is for you. Formal valuations can also be used in case of a divorce when you are selling your company or planning for retirement. They can also be used in case one partner wants to exit a business. All in all, formal business valuations are your best bet when you need an official statement of your business’s worth.
You can get both formal and informal business valuations from our team. Choose your preference and speak to us today.
Mathieu Paul
Director – Business Improvement
P: +618 6315 2755
E: enquiries@wabusinessvaluations.com.au
The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.
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Reference Links:
1. https://www.thayerpartnersllc.com/blog/what-is-an-informal-business-valuation
2. https://www.smytheratcliffevaluations.com/news/retirement-estate-planning/
