Main principles of business valuation

The concept of value and some of the main principles of business valuation.

1.  Value differs from price

"Price is what you pay.  Value is what you get."  Buffett once said.

But, only if you do your homework.

Getting to the right price in any deal involves understanding what business assets are truly worth and then structuring a deal around financing and tax realities.

2.  Planning drives value

Creating value involves business planning and execution.

Creating value - long term growth in asset value in a company you've built - is something you need to focus on, because a company is the sum of real and tangible assets, investments, ideas and management talent.

If you can look at all those working parts of a business through the prism of value, the desire to determine and create value in a company can become a much more important driving force in its growth than simple profits and losses.


3.  No two valuations are exactly alike

No two businesses are exactly alike; neither are the goals and circumstances of business owners.

Valuation isn't an exact science for another reason as well:  "The risk inherent in any business situation is far from static.  Depending on the economy and the state of the industry the business operates in, the company may be under tremendous prssure to stay afloat, or it may have great opportunities for growth.  Any time the economy goes through a major convulsion, people take a fresh look at what value means and at the realities of any deal.  In 2008, US was in the grip of a worldwide credit crisis - an economic slowdown that is redefining the values of a host of assets, from companies to private homes.

Proper business valuation takes a lot of practice.  People with finance degrees and long experience in accounting or other numbers-related fields aren't always natural at valuation, either. You should learn the ins and outs of business valuation and know the areas in which you can handle valuation on your own - and those for which you should hire some help.

4.  Valuation isn't a one-time deal

Most tax, business, and personal finance experts say that even if you're years away from retirement - or years away from your next business idea - keeping your valuation numbers current is a good idea.  This way, you can make changes and investments in the business so you can leave the business with the highest valuation possible.

How often should you run valuation numbers?  It varies based on need. 

If you're working with a business or tax planner, discuss the creation of a valuation system for your business, whether it's something you access yourself or have an expert handle at regular intervals.