After taking my class, most of my students understand why business valuation is important. I've had Michael Blake, a valuation expert from Habif, Arogeti & Wynne LLP, attend class to discuss valuation issues. But, frequently, valuation is a secondary concern to entrepreneurs.

When I talk about business valuation, I'm referring to knowing how much your business is worth. I've read that Facebook's valuation is $6.5 billion. I've also read that its valuation is $10 billion. Indeed, a company's valuation can be a moving target.

Nevertheless, knowing the value of your business is essential regardless of whether the business is a high-growth, high potential business or a lifestyle business. Why should the emerging entrepreneur care? I can think of several reasons:

The Beginning - Businesses will require money to get off the ground. The first source of funding normally comes from the entrepreneur. When the entrepreneur is first starting out and finds someone willing to invest in the company in return for stock, i.e., an equity investment, things can get complicated fast. The value of the company is critical in determining the percentage of the company the entrepreneur must give to the investor.

Suppose you need to raise $500,000. If your business is valued at $1,000,000, then an investor will receive 50% ownership in your company. However, if your company is, instead, valued at $2,000,000, then the investor will only get 25 percent ownership in your business. For the same amount of investment, the entrepreneur is better off when the value is high because she will give up less ownership for a given equity investment. The investor, on the other hand, typically argues that the company is worth less than the entrepreneur wants it to be.

In reality, it is more complicated than my example illustrates as there are other factors that come into play, but it shows why valuation is important in the early stages of the company.

The End - When an entrepreneur starts a business, he or she should run it as if it will eventually be sold. Many entrepreneurs start a business in order to grow the business and then sell it. In fact, for companies that accept equity investments from angel investors, venture capital firms and even family, friends and fools, selling the business is the most common way that entrepreneurs pay back those investors. Just as important is that selling the business is how most entrepreneurs create wealth. The idea is that the business can be sold for an amount that will allow the entrepreneur to retire or move on to the next business. 

Entrepreneurs will most often sell their business to a larger company. Another option is to undergo an Initial Public Offering (IPO) by selling shares to the public. This is viable for only a small fraction of entrepreneurs and is much more complicated than selling the business. Selling a business or going IPO can provide riches that can be used to retire, fund other businesses and share those riches with the employees and investors who helped create the value in the company. Even if you expect to pass the business on to heirs, running it like you will sell it gives you more flexibility to sell it or to pass it on and will be important for tax purposes.

Under any of these circumstances, the owner needs to know how much the business is worth because its valuation will determine how much the business can be sold for.

While Operating the Business - Valuation is also important when the entrepreneur needs to give equity in the company to talented employees. Many businesses will use stock based incentives to attract and retain the best employees. This type of compensation includes stock awards, stock options and other methods. Valuation is necessary to determine how many shares or options the entrepreneur must give to the key employee.

The business valuation business is very complicated. You will need to hire an outside expert to do it. Before doing so, you must carefully consider the background and reputation of the person or firm you hire and call their references.

Greg Henley is the Director of the Herman J. Russell, Sr. Center for Entrepreneurship at Georgia State University. His background includes entrepreneurial experience both as a practitioner and as an academic. Dr. Henley received his doctorate is from Columbia Business School with a concentration in Strategic Management and Entrepreneurship.