Importance of business valuation
Valuations help measure progress
Valuation, if done regularly, can help the business measure its progress toward its goal and help steer it to achieve its objectives. A valuation can help in decision-making and should be used alongside the strategic business plan of a company.
It can help identify gaps in the business
Valuation uses the Key Performance Indicators, also called the KPIs, and dives into the non-financial aspects of the company, which are the value drivers. This helps in providing a base for increasing the value of the organization.
Valuations provide investors with an understanding of the business as well as its leverage. This can significantly aid in securing capital for the business.
It helps create accountability
Once a valuation is done to identify the gaps and understand where the business lies to the goals, it creates a sense of responsibility and accountability to achieve these said goals.
It helps provide a benchmark
Having a sense of the value of the baseline can help the business in benchmarking against its competitors and peers.
Absolute and Relative Valuation
Absolute valuation refers to the valuation done which examines the intrinsic value of an asset or the company being valued without comparing it with others and peers. The discounted cash flow analysis is one of the most preferred methods of absolute valuation.
On the other hand, relative valuation is just opposite to that of absolute valuation and values, an asset or a company is based on the value of similar assets and companies. This is a method of comparable valuation.