A buyer seeks to learn about a company before taking any kind of purchase decision. A way to learn about a business and its position in the market is to go through the valuation report of the company. A business valuation report not only lets the buyer know the worth of all assets of the business, but also understand the future prospects of the business. This is the reason why most small companies have their companies valuated, for a business valuation increases its authenticity in the market. However, it is to be remembered that no business valuation can be fully precise. There are a number of factors which affect the valuation of the business in a number of ways. These factors causes variation in the subjective apprehension of the business report resulting in inconsistency in the opinions of the buyer and the seller. Four among these factors are discussed as follows.
1. Market conditions The worth of any business largely depends on the condition of the industry it is in. Not all industries do well at a particular point of time. Some industries are in the growth stage, some have matured enough and some are in their decline mode. Companies which lie in the growth stage naturally generate an attractive business valuation report in comparison to one in its maturity stage. Needless to say, companies which have entered industries with very few suppliers tend to generate greater business worth. Investors must understand this anomaly and study other market forces which might affect the particular industry before taking up the ultimate decision. 2. Valuation method There a number of valuation methods which are employed for calculation purposes and determining the answer to the question, ‘what is my business worth?’ It is not surprising that the value of the business might vary with the valuation methods. This trick might be played by the seller to generate an exaggerated valuation of the business which might mislead the seller. The investor must look into the method used for valuation and compare it with other methods in order to get a more genuine picture. 3. Valuation tools
A number of firms provide business valuation services in return of a certain amount of payment. However, not all of these service providers are authentic in nature. Purchasers must enquire about the business valuation firm involved in the valuation. Nowadays, online business valuation calculator is becoming popular due to their usability and genuineness. This is really a very good idea considering the authenticity of software programs. 4. Predictability discount A factor most investors neglect is the errors in predictability of a company’s growth. A valuation which reveals a positive trend in future profitability curve might not be true always, given the fact that no firm can guarantee consistency in its dealings. To counter this error and retrieve a more accurate value, the investors must levy a discount on the predicted value of the company.