Business valuation is a complex process of calculating the true worth of a business. It is a reliable method that helps in arriving at the value of a business that further can help in proper decision making. These may include public offering, sale of a business, acquisition, partner entry or exit, etc. Various methods can help in business valuation. However, the selection of the best and the most relevant method for arriving at the correct value requires knowledge about various aspects. The methods undertaken by the providers of financial advisory services have been categorized under three approaches that are as follows;
- Asset method of valuation:
Considered as the easiest method of business valuation, the asset-based approach of calculating business value involves adding up the fair value of the assets owned by the business and deducting liabilities from the same. The fair value refers to the true value of assets that have been adjusted by factoring in depreciation. This method helps in reducing the hassle the business owners and investors face for arriving at the correct value of the business.
Also, due to certain drawbacks, organizations opt for a replacement cost method too. This method helps in arriving at the true value of a business by calculating the cost of actually replacing an asset.
The asset-based approach is considered the easiest and most effective means of calculating the true worth of a business.
- Income-based methods of business valuation:
Another method of business valuation is the income-based approach. This method involves the calculation of discounted cash flow of a business that refers to the current value of future earning potential or cash flow of the business. This cash flow can be further divided into cash flow to creditors and shareholders. In short, the business’s earning potential in terms of cash flows is calculated that can help in the payment of various obligations with ease.
The income-based approach is also an easy and convenient process of calculating the business value.
- Market-based approach:
The market value approach of business valuation involves arriving at the value of a business by comparing the same with another similar business that has been recently sold or valued. This method compares different aspects like the fair value of the assets and therefore makes necessary adjustments due to differences in the two businesses based on various aspects like type and quantity of assets etc.
After identifying the business, the businesses’ financial information is identified that can be compared like revenue, net debt. Next, comparable ratios are identified like price to earnings ratio, EV/EBITDA, EV/Gross Profit, and various others. These serve as multiples that when averaged and multiplied with comparable financials can help arrive at the true value.
This method is a time-consuming process and requires analysis of various aspects and factors. Moreover, the assistance of a dedicated valuation service provider is necessary for the use of a market-based approach to business valuation.
How to select the best method?
Business owners or investors can easily select the best method by identifying the purpose of valuation and the type of data available with them. Selection of the best methods with the financial services consulting can help in reducing the hassle and time required for arriving at the true value of a business.
