Business Valuation: Meaning, Process, and Methods
A business valuation means estimating the present market value of business organizations, firms, or entities. It is very different from normal appraisals, which take into account only the tangible assets. However, business valuations consider tangible as well as intangible assets of the business house.
There are several reasons as to why the owners may go for business valuations. It includes valuation for estate tax planning, purchasing the new business, for filing the loan documentation, litigation, study to verify the purchase price of the business or for divorce purpose.
The process of business valuations Steps:
- The business valuation organizations study the details of the company and its business plan of the firm they are valuating.
- They gather information from the company owners, management and check the records to figure out the purpose of the business valuation.
- Analyze the financial statements and check the statistical and relative data of the company.
- Business valuations organization investigates the internal as well as external financial facts and projections.
- They calculate the value by considering a different method of business valuations and calculate the value.
Thus, the business valuation investigates the entire composition of the business organization’s financial status and its worth.
Methods Of Business Valuations:
The process of revenue multiplication varies from one valuation organization to others and depends on the magnitude of the business, which has to be valued. The business valuation organization works for similar types of ventures. The valuator compiles the data by considering the sales level. Then, it estimates the business valuations using industry rules.
In this method, also the business valuation firms work for a similar type of businesses. It means that if a valuation firm is expert in evaluating the steel related business, it conducts a business evaluation of steel ventures only. Here, the appraiser gathers information about similar ventures that are sold recently. It also considers the revenues, assets, liabilities, and net profits of the current venture.
Cash flow method:
In this method, the business valuation firms consider the cut-rate cash analysis and a multiplier of the net earnings (before deducting income tax, depreciation, and amortization).
This method of business valuation is a fusion of net worth of assets and multiplier of yearly cash flow. Here, the multiplier is comparatively low as valuators add it to asset rate. Methods used for business valuations depend on the type of ventures. The business valuations of mid-market and large market firms depend on the EBITDA (earnings before interest, taxes, depreciation, and amortization) multiplier. Small ventures sales use revenue multiplier or asset method for valuation. Thus, this is all about business valuations