Business valuation is a process and a set of processes that is utilized to evaluate the economic value of an owner's interest in a business. Business Valuation is used by the members of the financial market to regulate the price they are agreeing to pay or receive the profits from sales. It can be used to determine the fair value of a business for various reasons, which includes sales value, ascertaining partner ownership and taxation.
Valuations must be used as a powerful element in the determination of the business is being managed and how the business activities are being undertaken. The purpose of a business valuation is to track the effectiveness of the premeditated decisions made and the process of initiating different strategies and provide the ability to track performance with regards to the estimated change in value, not only earned revenue.
When valuing a company as a going concern, there are three main valuation methods used by industry practitioners:
In this section, we will talk about the different methods used in order to calculate the economic value of a business. It is significant for a business to understand the various methods, as he will have to use them by undertaking these methods.
The first method is the evaluation of the total number of assets the company owns. The assets of the company consist of the tangible as well as intangible items. The market value of the assets is used in order to achieve the company’s worth.
Historical Earnings Valuation
The gross income of the company, capability to repay debts and capitalization of cash flow or earnings in a particular financial year determines its current value it is holding. If the business is finding it difficult to bring in enough income that could pay out the expenses, its business value is bound to drop. On the contrary, repaying the debt on time and maintaining a positive cash flow improves the business’s value. The mentioned factors are used to determine the business’s historical earnings valuation.
In this method of valuation, a comparison is undertaken with a similar business. The value of the assets of the business is compared to the assets to a business that contains similar assets and value is achieved.
Future Maintainable Earnings Valuation
It is significant to calculate the profitability that the business could bring in the future, which is the objective of this method. To calculate the business’s future maintainable earnings valuation, the evaluation of its sales, expenses, profits, and gross profits from the past three years are calculated and evaluated. These figures help the business predict the future and eventually provide the business value in the present.
Discount Cash Flow Valuation (DCF Valuation)
If profits are not expected to remain stable in the future, use the discount cash flow valuation method. It takes your business’s future net cash flows and discounts them to present day values. With those figures, you know the discounted cash flow valuation of your business and how much money your business assets are expected to make in the future.
For the purpose of evaluating and calculating the business value, there is a requirement of various documents. In this section, we will talk about all of those important documents. Details about Company Promoters, Key Management professional of the Company, Memorandum of Association, Article of Association, Prospectus, prior three years financial statements, a copy of the valuation engagement with the clients, these are some of the documents that are a necessary requirement from the business.
This section mentions some essential components that must be included in the valuation report. Taking into consideration important factors such as shareholders interest, necessity for transparency & upholding corporate governance principles as well as in view of the aspects of minority interest & corporate governance the Expert it is recommended that the following matters must be covered in summarized Valuation Report, in an unambiguous and in a manner that is not misleading and it must also maintain confidentiality.
The appropriate evaluation of any business is essential and therefore it must be conducted. Appropriate methods must be used and the business owners must ensure that the results are accurate. The accuracy of the results is important because it determines the worth of the business and predicts its future.