The value of a business is judged by the price an investor is willing to pay for it. Initially, every company is worth only its incorporation expense but when people, money, and assets are developed, the company appreciates in value. The value of any company is determined by many factors including the market trends, financial track record, future performance potential etc. Business valuations give you a fair estimate of the worth of your business. These come in handy when you are looking for selling your business, adding shareholders, expand or acquire a new business etc.
When you are adding additional shareholders to your business, you will need to know the exact value of the shares and their current worth and future potential. An accurate business appraisal helps you understand the true value of your business that can be passed on to the new shareholders.
Here’s how a business evaluation can help while adding additional shareholders:
Existing shareholders
An accurate valuation of your business could be an advantage as it assures the existing shareholders of the worth of their shares. When you add shareholders to a company, the existing shares will be effectively diluted as the shareholders increase mainly because the total number of shares for your company increases. The existing shareholders will expect proof of the existing value of your business in order to ascertain that they will not lose money while you sell new shares.
Provides a basis for the value of the new shares
If you are selling new shares, you will need to know the worth of your business to decide the price of each share. If you are not sure of the value of your business, it is practically impossible to finalize a share value. A thorough analysis of all the factors that determine the current value and future potential of your business will help you determine the price at which you should be selling each share.
Provides documentation
When you add new shareholders, whether, in the form of new shares or a rise in equity, they will require some kind of documentation that proves the worth of your business. You should be aware of the worth of each share and this is exactly why a business appraisal is important.
Ensures that you are not undervaluing or overvaluing your business
The value of a business is not based on the tax returns or a balance sheet. It will definitely not reflect the accurate value of your business. This is because, in accounting, your assets depreciate in value with time following a standard depreciation table. Your equipment and other assets might be worth more (or less) than that! Well, only a proper business valuation will be able to tell you whether you are overvaluing your assets or undervaluing them.
Business valuators take a lot of factors into consideration when they prepare an estimate of the total worth of your business. It is hence advisable to approach a professional appraiser to perform a thorough evaluation of your business and then decide how much your new shares are worth!