Whenever a business entity is set up, it acquires a certain amount of value. This value is affected by the rise and fall in the life of the business entity. The value can get larger than what it was when the business was started or the value could go down. Knowledge of the value of the company is very important from the point of view of the business. This value comes in handy when discussing mergers or acquisitions.
Knowing the value of your company is very crucial as all your business partners such as creditors, shareholders, suppliers that give massive stress on the valuation of the company and will join hands with you only after carefully ascertaining the value of the company, and this is where Business Valuation comes in.
This article will give you a clear understanding of what business valuation is all about and the most appropriate methods to be used.
What is Business Valuation?
Business valuation is a process by which we can estimate the economic value of a business or a company. The method of Business Valuation can be used to determine the fair value of a business which helps the management to establish a sale value of the company. It also acts as a tool that helps in resolving issues relating to partner ownership, divorce litigations, etc. Moreover, it also helps in mergers, acquisitions and takeovers as the company’s value is considered as a basis of negotiation between the two parties.
There are many ways of measuring the value of your business. The mainly five types of business valuation methods are:
The assets of your company are inclusive of both tangible and intangible items. The asset valuation method uses the book value (also known as the market value) of all the assets to determining the amount or the worth of your business. This means it calculates all the tangible and intangible assets such as cash, stocks, buildings, goodwill etc. and adds all of them to finally come at a value for your business. This is the most common types of business valuation method.
Market Capitalization is one of the simplest methods of business valuation. It is also known as the market cap, and it shows the value that the investors think that the business is worth at a particular point in time. It can be calculated by multiplying the company’s total number of shares by the price of a single share in the market. This means that the market capitalization of a company can raise or fall depending on the current share price.
For EG. If the total number of shares = 10000 and the cost of each share of the company = 150 then the value of the company = 10000 X 150 =1500000
This method is also known as the Price-to-Earnings (P/E) Ratio. It is a valuation method that takes the current share price of a company and compares it with its per-share earnings. The profit of a company gives us a lot clearer picture of the financial well-being of the company. A higher PE ratio means that the investors are anticipating higher growth in the company.
4.Discounted Cash Flow (DCF)
Discounted Cash Flow (DCF) is a valuation method which is used a company, entity or asset using the concept of the time value of money and estimates the cost by its future cash flows. Then a present value is determined which helps to evaluate a potential investment. If the amount calculated through this method is higher than the current cost, then the option is to be considered by the management.
The liquidation Value method stands as one of the most straightforward and easy methods of evaluating a business. Assuming that a particular business would sell off all its assets and pay off all the liabilities, the cash that it would receive will be the liquidation value of the business. The catch in this valuation is that it does not consider the benefits of intangible assets such as goodwill and trademarks. It is usually lower than the book value.
By now you might have got a clear picture of what business valuation is all about and the different methods of measuring it, that are widely used by investors and businessmen in the market today. All the methods vary in complexity and are very important. However, the question is what makes them valuable to us?
Importance of Valuation
There are significant benefits of the valuation process for a business. These benefits are given below:
- Provides a complete knowledge of all the assets of a company
- Helps in finding out the Resale value of a company
- Helps in finding a true and correct value of the company
- Provides better leverage during Mergers and Acquisitions
- The business gains the ability to gain more investors.
- Allows for the use of better exit strategy for the company during bankruptcy, liquidation of the company
- Useful in case of raising funds
These benefits make the valuation of a company a vital tool for the shareholders and directors alike. The Business Valuation process may be comparatively more natural for start-ups or small scale businesses, but as the scale of the business grows the complexity in the valuation process will also increase. It is recommended to outsource the business valuation to professional experts so that you can get an accurate value of your business entity. Wondering whom to approach? Don’t worry.
We at JAXA can take care of all the complex processes so that your mind is at peace. We are a team of professionals that provides focused and customized accounting services in Dubai and are considered as one of the top business accountants in the UAE. We also offer other assorted services such as Cash Flow and Forecasting Services, Corporate financial services and many more. In case of any questions, please contact us- we’d be glad to assist you.