Valuation of Business:
Table of Contents:-
A general process to determine the economic and monetary value of the whole business is called Valuation of Business or Business Valuation. Carrying out Valuation Services to find out the true net or the total worth of the company can be done for various reasons like-
- Incoming Investors
- Lawsuits including divorce proceedings
- Business sale value
- To establish any ownership with partnership
- Partner exits
- Taxation purpose
- For any kind of public offerings
- To obtain certification for the net worth of the company.
Approaches for Valuation of Business:
There are several methods and approaches provided by the economists, academicians and professionals through which the process of valuation of business can be carried on. Just like Methods of valuation of Immovable Property and assets the approaches for business valuation are-
- Asset based approach- This approach to find the valuation of business involves Net Asset Value (NAV) that is easy to calculate and understand. NAV is calculated by simply getting the fair value of the business assets subtracting the owed external liabilities. The main focus in this method is to determine the fair value of the assets as it can differ or vary from the acquisition value of the non-depreciating assets and the recorded value of the depreciating assets significantly. Which means the value of the business can slightly be higher than the total value of all the assets combined. The replacement cost method which is an extension to the NAV Method takes all these possibilities under consideration and valuate the business.
- Income based approach- In this approach, Discounted Cash Flow (DCF) is used to calculate the value of the company. The present value of the future cash flow in the company is to be calculated in which the cost of capital of the company is used to do discounting in the present value. As per the objective of the Valuation of Business one of the two either the cash flow to the company to calculate enterprise value or the cash flow to the shareholders to calculate equity value is used.
- Market based approach- The market-based approach is used for valuation of business when the firms wants to identify the similar markets or firms or businesses. It is used when the business organizations want to choose the correct variables and multiply them. It is also used to identify the suitable multiples like Price/Sale (P/S), Enterprise Value/Earnings Before Interest, Taxes, Depreciation and Amortization (EV/EBITDA), Price/Earnings (P/E), and Price/ Book Value (P/BV) to be used during Valuation of Business.
Ways to choose the best method for Valuation of Business:
Choosing the best method or approach for the valuation of business by a person involves consideration of several important aspects and facts. It is a complex process but requires some common sense to go with the method best suited to the requirements of the business owner. To choose the most suitable method one should-
- Know what is the data that is available at that particular time.
- The levels of the details that is required for valuation of business.
- Check the suitability and the appropriateness of the approach chosen for the business or company.