Do You Know The True Value Of Your Business?

  • Matchvalley
  • 11-09-2017
  • 3

As an individual, we often calculate our net worth which is simply our assets less debts/loans, but as entrepreneurs we ponder over the question “what is the true value of my business?”. Every entrepreneur has an idea about the value of fixed assets owned by their business but is that the only value that a business has?

In simple terms, Business valuation is defined as the process of ascertaining the “Economic Worth” of a company based on its business model and external environment. Calculating the value of a business is not easy as it involves the inclusion and computation of a large quantity of data.

Here we would like to share our views to the following questions

  • Importance of knowing the true value of your business..?
  • Factors considered in valuing a business..?
  • How to value your business..?

Importance of knowing the true value of your business

    Entrepreneur’s perspective:

  • Ideally an entrepreneur should analyze the worth of his business periodically. This information could be helpful in any event of change in business ownership; an external finance is required for restructuring or expansion, an opportunity to merge arises or an exit strategy is being contemplated or when shareholders are quitting or a new partner is walking in and needs to know his share of investment etc.
  • In this competitive world, no business can sustain without growth. Growth of business requires, among others, identifying the favorable factors for the business and finding potential investors to partner with. For an investor to invest, it is necessary to evaluate the value of business in the most realistic manner. Thus, a valuation report is a requisite tool to attract potential investors.

    Investor’s perspective: 

  • To understand the value of investment opportunity. A valuation helps the potential buyer/investor to forecast the approximate rate of return on investment.
  • Investors get a chance to understand the business plan in detail and challenge/negotiate potential risk factors that might have an impact on the business.

Factors considered in valuing a business

Though the factors that ascertain the true value of a business varies from case to case, following are a few of the important factors to be considered:

  • Nature of business, its history, prognosis and growth capability
  • Promoter and management strength
  • Uniqueness/innovation element of the product/service if any
  • Competitive landscape
  • Customer loyalty and relationship with suppliers
  • Historical financials and future predictions
  • Economic outlook in general (including industry growth potential)

How to value your business

Listed below are the generally acceptable methodologies of valuation:

1. Asset approach : Usually applied for valuing companies that have grown to their peak stage or companies that are on a downward growth phase and real estate & investment companies that have a huge asset base.

  • Book value method- based on the value of assets and liabilities as appearing in the Balance Sheet.
  • Replacement cost method- The current cost of setting up a plant or buying an asset of similar size and capacity is considered and applied to arrive at the value.
  • Liquidation value method- The value that the various assets would fetch if they are sold, is estimated to find out the total value.

2. Income approach: Based on the assumption that the present value of a business is a function of the    future earnings that the business is expected to create.

  • Discounted Cash Flow method-The future free cash flow is discounted to arrive at a present value estimate.
  • Capitalization of earnings method- A capitalization rate is used to relate between the future and current earnings.

3. Market approach or Relative Valuation method : The company/assets/transactions are compared with its peers. However, selection of comparables is a critical task as this is subjective and various factors need to be considered.

  • Comparable companies multiples method-The market multiples of equivalent companies are calculated and applied to arrive at the business value.
  • Comparable transaction multiples method – Here the transactions that happened in the immediate past or is currently happening in similar industry is taken into account and is commonly used in the case of M&A.
  • Market value method- Suitable for listed companies that have frequent nationwide trading of its shares where the implicit potential of the company is reflected in the market value.

Rather than depending on one method, two or more methods could be considered which must be reconciled with each other to arrive at a value conclusion. As there are numerous methodologies involved, identifying the right valuation method that suits the industry based on its size, regulatory environment, area of operation etc can be best left in the hands of a financial expert. Accurately valuing a business is often a tedious and challenging process. It is a subjective procedure that depends on the professional experience of the valuer rather than a science based on theoretical studies and principles.

 

Contact us at www.matchvalley.com for a free consultation regarding your business valuation.

E-mail : hello@matchvalley.com

Mob : +91 8593939977

 

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By sangeetha 9 months ago

NICE

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By Lijith 9 months ago

Good one

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