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Everything you need to know about business valuation

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Business valuation is defined as a process that is undertaken to determine the economic value of an owner’s interest in the business and its activities. There are several methods by which the value of business can be identified by business owners. In this article, crucial key points of business valuation will be mentioned. Business assessment is used to identify the fair value of a business for several reasons such as sale value, establishment of partner ownership, taxation, etc.

What is the importance of business valuation?

The method of Business valuation used by companies proves to be beneficial in various aspects. The following are some benefits that business assessment provides to various individuals –

  • It is used as a crucial aspect for the effective management of the business
  • It is utilized to track the effectiveness of the strategic decision making process
  • It provides the ability to track performance with regards to change in value

How to calculate the value of a business?

The value of a business or business valuation can be calculated with the help of a simple calculation. Subtracting all the liabilities of the business from assets will give the value of the business.

What are the methods of business valuation?

Business valuation can be undertaken in several ways by businesses and large corporations. The three well known methods for the determination of business assessment are –

  • DCF Analysis
  • Comparable company analysis
  • Precedent transactions 

What are the advantages of business evaluation?

Business valuation serves to be beneficial in various aspects. It allows the company owners to understand where to reinvest in the company and how much to sell the company for.

What are the business valuation methodologies?

The business valuation method is divided into various categories which will be discussed in this section.

The four major methods on the basis of which business assessment is undertaken are-

  • Asset based method
  • Income based method
  • Market based method
  • Other method

Asset method

  • Book value method
  • Liquidation value method
  • Replacement value method

Income Based Method

  • Capitalization of Earning method
  • Discounted Free Cash Flow Method

Market Based Method

  • Comparable Company Market Method
  • Comparable Transaction Method
  • Market Value Method

Other Method

  • Contingent Chain Valuation
  • Price of Recent Investment Method
  • Rule of Thumb

Who evaluates business assessment?

An individual, who is known as a valuator, is assigned for the task of determining the value of the business. They evaluate business’s projections and every activity that takes place in the business.

What elements help in the determination of business valuation?

The elements that help in understanding the value of business in a better manner are as follows –

  • Profitability
  • Growth potential
  • Working capital
  • Exclusivity of the business

What is included in the content of a business valuation report?

A report that contains all essential details with regards to the business is a business valuation report. Various elements included in the report are as follows-

  • Background Information
  • Purpose of Valuation & Appointing Authority
  • Identity of a valuator and individuals that will undertake the valuation
  • Disclosure of interest of the valuator
  • Date of appointment, valuation date and the date of report must be mentioned in the report
  • Sources from where information has been gathered is specified in the report
  • The steps that was taken in undertaking the business evaluation
  • Valuation method adopted by the valuator
  • Factors that affected the valuation must be mentioned

What documents are required for business valuation?

Documentation is an important part of the process of evaluating the business. Thus, essential documents must be submitted by the business for a successful business valuation.

Certain documents that must be submitted as a part of the process are as mentioned below –

  • A copy of the previous valuation report
  • Documents that are related to assumptions and limiting the conditions in the valuation assignment
  • Information collected and evaluated to obtain the understanding of matters that might affect the value of the subject
  • Documents pertaining to the selection of a valuation method which will be used in the valuation assignment containing the rationale and support for their own use
  • Restrictions that an valuator is facing or any data that he is unable to receive
  • The basis for using the valuation assumption during the valuation engagement.
  • Documents with regards to any rule of the thumb used in valuation, sources of the data collected and the method in which the rule of thumb was functional.

Conclusion

The method of business valuation highlights those aspects of the business that might prove to be profitable. It helps in the strategic planning of the business and the business can make changes in its already defined plans and strategies. One of the major purpose of conducting a business assessment process is to identify the critical value generating areas of the business.

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