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Why Is Company Asset Valuation Necessary?

By Helene Norris


Company asset valuation has many benefits whether one wants to sell their business or keep it in operation. There are various reasons why you may need to determine your business's worth. It could be to avoid a potential legal or financial problem or even exploit an opportunity. Understanding the benefits and purposes of business valuation will help you take the important steps to keep your books in order.

When one wants to buy another business or sell the existing venture, an appraisal will offer a detailed account of particulars such as liabilities, profit numbers, expenses and revenue. Such information helps one determine future profits. It also helps in deciding the fair price of the firm.

When partners decide to part ways, it does not necessarily mean the business has to close. If one or more partners want to buy out their colleague, an appraisal could help them in this procedure. They could also be intending to have a third party buy the business. If one partner dies, his/her heirs will want to know how much their entitled share of the business amounts to.

When a business wants to obtain capital or expand, a viable option would be to source for an investor. For such a person to inject their capital, they could want part ownership, a portion of the profits or the right to open other outlets under the firm's name. When making a pitch to such investors, an appraisal will be of great help.

Financial institutions usually require some sort of collateral when advancing secured loans. For instance, you may obtain a loan to purchase new equipment or increase the firm's capacity. An up to date appraisal makes it easy for potential lenders to assess your firm's standing.

If a firm gets passed on to inheritors, they may push to reduce their tax liability by lowly valuing their firm. Here, some individuals may want to expose various weaknesses to third party appraisers. In the event of a divorce, one party may seek a low appraisal while the other wants a high one.

New proprietors could also feel that the existing firm has a complementary fit with their existing entity. This (the existing firm) may bring in a customer base and reputation which would mean that one invests less money. When this happens, the firm's assets have to be re-appraised, often with a step up in valuation.

The value of public corporations is normally tied to the value of their stock. This is the amount at which investors value the firm at any moment. Though this isn't the sole constituent of a firm's value, it is normally the major part. Privately owned firms lack this benefit of appraisal of ownership because each firm has a distinct structure. Professionals thus utilize economic models that estimate a firm's value based on a number of assumptions.

Company asset valuation is more of an art than it is a science, though there are some economic models used when experts want to reach an opinion on the worth. Scientific formulas are normally used. Intangible assets like reputation and goodwill are particularly hard to appraise. This is why any opinion from an expert on the worth can only form a basis for negotiating and not the final say on a company's worth.




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