A business valuation is the process of determining the economic value of a whole business or company unit. Business valuation can be used to determine the fair value of a business for a variety of reasons, including sale value, establishing partner ownership, taxation, and divorce proceedings. Owners will often turn to professional business evaluators for an objective estimate of the value of their business. It can also be necessary to calcuate this value when seeking investors or other types of small business financing.
All business valuation methods are ways to establish how much your business is currently worth. Included in these calculations are the values of your equipment, inventory, property, liquid assets, and anything else of economic worth that your company owns. Other factors that might come into play are your management structure, projected earnings, share price, revenue and partner ownership percentages.
Some of the approaches we use - review of financial statements, discounting cash flow models and similar company comparisons.
Valuation is also important for tax reporting. Some tax-related events such as sale, purchase or gifting of company shares will be taxed depending on valuation.
Market capitalization is the simplest method of business valuation. It is calculated by multiplying the company’s share price by its total number of shares outstanding. For example, as of January 3, 2018, Microsoft Inc. traded at $86.35. With a total number of shares outstanding of 7.715 billion, the company could then be valued at $86.35 x 7.715 billion = $666.19 billion.
Under the times revenue business valuation method, a stream of revenues generated over a certain period of time is applied to a multiplier which depends on the industry and economic environment. For example, a tech company may be valued at 3x revenue, while a service firm may be valued at 0.5x revenue.
The earnings multiplier may be used to get a more accurate picture of the real value of a company, since a company’s profits are a more reliable indicator of its financial success than sales revenue is. The earnings multiplier adjusts future profits against cash flow that could be invested at the current interest rate over the same period of time. In other words, it adjusts the current P/E ratio to account for current interest rates.
This method is based on projections of future cash flows, which are adjusted to get the current market value of the company. The main difference between the discounted cash flow method and the profit multiplier method is that it takes inflation into consideration to calculate the present value.
This is the value of shareholders’ equity of a business as shown on the balance sheet statement. The book value is derived by subtracting the total liabilities of a company from its total assets.
This is the net cash that a business will receive if its assets were liquidated and liabilities were paid off today.
This is not an exhaustive list of the business valuation methods in use today. Other options include replacement value, breakup value and asset-based valuation.
If this topic has piqued your interest in the field of business valuation, the ACCA offer courses and accreditation. You can find out more here:
To schedule a valuation of your business or for more information don’t hesitate to get in touch.