Understanding the Methods Involved in Business Valuation
Business valuation is one of the critical factors every entrepreneur needs to take care of for their business. Business valuation, also known as Company Valuation, is the financial value of your business. This is determined by its departments and the business units it owns.
A business valuation consultant finds the appropriate value for your business by considering several factors. These include the market capital, assets of your business, profit margins, board management, taxation, etc. All of this is followed by a predefined standard operating procedure that consultants follow to evaluate a certain business.
6 Methods of Valuing a Business.
- Market Cap: Also referred to as Market capitalization, it is one of the easiest ways to evaluate a business. This is done by calculating the product of the company’s share price with its final number of shares pending.
- Liquidation Worth: Liquidation is the monetary fund the company would earn if it decided to liquidate its assets and all the liabilities were paid.
- Book Value: This is the value of the shareholders of a company, as stated in the balance sheets. Book value is calculated by finding the difference between the total number of assets and the total number of liabilities.
- Times Revenue: According to the Time Revenue Method, a flow of income is generated over a period and is added to a multiplier that depends on the market stability and the environment. For instance, a tech-based business will be valued at 3x its revenue, and a service-based company will be valued at 0.75x its value.
- Discount Cash Flow: Also popularly known as DFC Method, it is identical to the Profit Multiplier. The Discounted Cash Flow determines the flow of income that will be generated in the future. This process takes inflation into account as well to have a transparent image of the situation of the company.
- Profit Multipliers: This method gives an extremely clear report of the company’s doping in terms of finance. It is easier to determine the company’s valuation by the number of profits it makes.
All the methods mentioned above help a valuation consultant find the exact valuation of a company. There could be minor tweaks that could be made in this process according to the situation and the business. But the thumb rule is the same.
Finding a business’s valuation helps the owners find the business’s real worth. Additionally, it also helps them in finding the loopholes and blockers that are there which are preventing the business from excelling.