What is Business Valuation?
Business Valuation is the process by which the economic worth of a company is determined, business valuation calculations typically include the worth of your equipment, inventory, property, liquid assets, and anything else of economic value that your company owns. Other factors that might come into play are your management structure, projected earnings, share price, revenue, and more
Why Business Valuation?
These are the reasons why there would be a business valuation:
- Sale of business
- Business Financing/Investors
- Establishing Partner Ownership Programs
- To add shareholders
- Divorce proceedings
- Tax purposes
1. Market Value Valuation Method
The market value business valuation formula is perhaps the most subjective approach to measuring a business’s worth. This method determines the value of your business by comparing it to similar businesses that have sold, but this method only works for businesses that can access sufficient market data on their competitors
Small business valuation method is relatively imprecise, your business’s worth will ultimately be based on negotiation, especially if you’re selling your business or seeking an investor. This valuation method is a good preliminary approach to gain an understanding of what your business might be worth, but you’ll likely want to bring another, more calculated approach to the negotiation table.
2. Asset-Based Valuation Method
This type of approach considers your business’s total net asset value, minus the value of its total liabilities, according to your balance sheet. There are two main ways to approach asset-based business valuation methods:
- Going Concern – Businesses that plan to continue operating (i.e., not be liquidated) and not immediately sell any of their assets.
- Liquidation Value (Urgency Valuation – Much lesser than the fair market value) – The liquidation value asset-based approach to valuation is based on the assumption that the business is finished and its assets will be liquidated.
3. Return on Investment Based Valuation Method
An ROI-based business valuation method evaluates the value of your company based on your company’s profit and what kind of return on investment (ROI) an investor could potentially receive for buying into your business. This approach, you’ll often need more information to convince an investor or buyer of the result. An investor or buyer will want to know:
- How long will it take to recover my original investment?
- After that, when I look at my share of the expected net income, compared with my investment, what does my return look like?
- Is that number realistic? Ambitious? Conservative?
- Does it make me want to invest in this company?
4. Discounted Cash Flow Valuation Method
The discounted cash flow valuation method, also known as the income approach, for example, values a business based on its projected cash flow, adjusted (or discounted) to its present value. The DCF method can be particularly useful if your profits are not expected to remain consistent in the future.
5. Capitalization of Earnings Valuation Method
The capitalization of earnings valuation method calculates a business’s future profitability based on its cash flow, annual ROI, and expected value. Works best for stable businesses, as the formula assumes that calculations for a single time period will continue. In this way, this method bases a business’s current value on its ability to be profitable in the future.
6. Multiples of Earnings Valuation Method
The multiple of earnings valuation method also determines a business’s value by its potential to earn in the future. This small business valuation method, also known as the time revenue method, calculates a business’s maximum worth by assigning a multiplier to its current revenue. Multipliers vary according to industry, economic climate, and other factors.
7. Book Value Valuation Method
The book value method calculates the value of your business at a given moment in time by looking at your balance sheet. The book value approach may be particularly useful if your business has low profits, but valuable assets.
At the end of the day, business valuation is complicated—especially considering the different methods that are available to evaluate your business and determine its economic worth. Overall, it’s safe to say that one approach isn’t necessarily better than another, instead, the best assessment of your company will likely come as a result of combining multiple business valuation methods.
Valuation of a company is a tedious process which covers all these steps to evaluate the proper operation and financials over the years. This gives us the proper idea about the profitability of the company.
For any Business valuation services, contact Indefine, we are located at Bangalore
Phone :+91 8660949078
For any training services for the same contact: Learncrew, Bangalore