Easy business valuation methods

To start, Business valuation – is the process of defining value of the company or the value of 100% of the rights of the companies. This process is a regulated operation established by law. In addition, there are principles, followed.

For example, principal of replacement, change in value, utility, efficiency, fairness of valuation. Also, experts from different countries define some easy methods of business valuation. In addition, specialists use these methods in practice. Moreover, they connect. Sometimes both are used in the evaluation process.

Three approaches to business valuation:

1. Asset Approach
2. Income approach
3. Market approach

Asset approach to business valuation

It is the way to value the assets and liabilities of the company. Assets should not cost more than what it costs to replace its major parts. Also, the assets and liabilities of the company are accepted for calculation with the market value. It is important to consider the cost in terms of expenses incurred. Generally, companies use the asset approach in the valuation of real estate.

There are two methods of approaching assets:

• The net asset method gives the value of equity . Companies use this method when determining the residual value of the business. By the way, the calculation of the cost of activities by net assets is useful for companies in a state of termination of activities, restructuring or bankruptcy.
• Liquidity cost method concerns companies with major financial or intangible assets.

Income approach to business valuation

Of course, experts use it to define the assessment of expected benefits. Also, this approach is used to Calculate investment risks in the business. The other side of the coin is that this method is difficult to use in practice. It needs a lot of difficult calculations of the dynamics of profit changes.

Companies, prepared for merger or acquisition generally use an income approach. This is why there are two main methods:

• Method of Capitalization of cash flows . Enterprise value only defines cash flow. Cash flow – is the difference between the inflows and outflows of the business. Also, the research period is usually one year.
• Discounted cash flow method . This method focuses on expected cash flows. Its main difference from the previous method is that we count future entries. Thus, the discounted cash flow method is very popular in many developed countries of the world.

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Business Valuation Market Approach

It helps define the value of the Company or shares based on the actual market value of the property or similar shares of other companies. Moreover, the main idea of this approach is to compare the assets of similar companies.

The advantages of this method are:

• Assessment of actual supply and demand
• Reliable company data

The disadvantages are:

• Dynamic market conditions (meaning value, supply and demand are not fixed in time)
• Many companies keep information about assets and liabilities a secret
• Sometimes it is difficult to choose a similar company.

According to some experts, there are such methods of approaching the market:

• Compare the method of multipliers . It gives the real value of the business. Basically, the method is based on moment and interval indices. For example, price, net profit, income, dividends.
• Comparable sales method . The stock markets provide the main information for this method. This is information about previous transactions of the company being explored.

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Finally, the main idea of business valuation is to define the real situation with assets and liabilities, the net profit of the business. Also, it helps in calculating the supply and demand on the company’s products. All this information shows the real state of the business to the potential buyer or investors. And what do you think of the company’s valuation? Do you find any of these methods suitable for businesses in your country? If you have questions, Contact us. We are waiting for your answer.

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