Methods of Business Valuation

The Business Valuation Methods:

Valuation of Business means when the company’s value in monetary terms is being considered through various methods. Business valuation can be done for so many different reasons. For example: it can be done for selling the business, for settlement of legal matters, for overtaking a business firm etc. the methods that are used by a registered valuer doing the valuation totally depends on the reason and requirement and needs of the company.

Business Valuation

It is right to say that Business valuation determines the Company’s true worth or its net worth. And to get most out of the valuation process, businesses work with professional who then take care of the whole process. There are seven different approaches and methods that a valuer uses during business valuation. These have discussed in detail below-

 

  1. Market Value Valuation Method:

It is one of the most subjective approach for measuring or calculating the worth of the business. for determining the worth of the business, this method of Business Valuation compares the business with other similar entities that have been sold in recent times. It considers the market value of other companies that have similar operations and then comapre the business with them in order to get the worth.

  1. ROI-Based Valuation Method:

The Return on Investment (ROI) based business valuation method determines the company’s worth or value based on the profits and kind of return on the investments that an investor is likely or potentially will receive by investing in the business.

  1. Capitalization of Earnings Valuation Method:

This method of business valuation calculates the future profitability of the business based on the cash flow, expected value and return on investments of the entity. It works best for those businesses that are stable because the formula used under this method assumes the calculations for a particular time period will continue.

  1. Multiples of Earnings Valuation Method:

It is quite similar to the capitalization of earnings method for business valuation. It determines the value of business by the potential of the company to earn in future.

  1. Asset-Based Valuation Method:

This method uses and consider’s the toatal net asset value of the company minus the value of the liabilities as per the company’s balance sheet to complete the business valuation service. There are two approaches under this method that can be used by a valuer. These approaches are-

  • The Going Concern Approach: This approach must be used by those businesses that are not planning to stop its operations and want to continue them and are not selling the assets of the company immediately. The formula of this approach considers the total equity of the company for business valuation.
  • The Liquidation Value Approach: The second approach in the asset based valuation method uses the assumptions that a business is completely finished and will liquidate its assets. The value of business in this case is based on the total net cash that exists when the company was terminated and after the assets were sold.
  1. Discounted Cash Flow (DCF) Valuation Method:

The discounted cash flow valuation method is also known as the income-based approach for business valuation. It calculates the value of the business based on the projected or predicted cash flow that was adjusted or discounted in the present value of the company. The DCF method is particularly useful for those company’s, whose profits are expected to change and not consistent in the coming future.

  1. Book Value Valuation Method:

The last but not the least, the book value business valuation method determines the worth of the business at the particular given moment or time. This is done by properly going through the balance sheets of the organization. This method is useful for those businesses having low profits with valuable assets.

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    Author: Anil Agrawal
    EZYBIZ India Consulting LLP, New Delhi. The firm is business and tax consultancy firm providing consultancy in Taxation, Regulatory, Transfer pricing, Valuation, Corporate funding and Business set up matters. He may be reached at 9899217778 or anil@ezybizindia.in.
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