Be it a merger and acquisition or selling the business, all such situation calls for a business valuation. The process of business valuation is all about estimating the economic value of a business which is often based on a number of factors. The stakeholders of the financial market use the determined value to assess the price they are willing to pay or receive in case of a sale of a business.
Why is a business valuation needed?
A business valuation is essential on various occasions. Some of the typical ones are listed here:
* Business buyout or sale, acquisition or mergers, financing.
* Reporting of taxes: Gift or estate tax, charitable donations.
* Financial reporting: Portfolio valuations, price allocation and derivatives.
* Legal matters: Shareholder disputes, partnership dissolution, bankruptcy.
Key business valuation approach
* Intrinsic Valuation: This is based on assessing the value of what an asset is worth. Instead of relying upon the current market value of a particular asset, an objective financial model is used to determine its value.
* Relative Valuation: In this approach, the price of an asset is compared to the market value of similar assets. This is also known as ‘Comparative Valuation’.
Three Methods Of Business Valuation
There are three main methods of business valuation – asset-based, income-based, market-based.
> Asset-Based Method
The Asset-Based Method of valuation includes doing a sum-up of all assets of a company. The valuation based on this method can be done in two ways:
* Going concern: Also know as the ‘book-value’ approach, this method considers the total assets and total liabilities of the business. Based on the balance sheet, the value of a business is determined.
* Liquidation: This assesses the liquidation value or the net cash that could be received by selling the assets and paying-off liabilities.
> Earning Value Method
The assumption that the value of a business lies in the ability to produce wealth in the future forms the basis of this method. This can be done in two ways:
* Capitalizing Past Earning: The past record of earnings of a company is used.
* Discounted Future Earnings: An average of the predicted future earning is used.
> Market Value Method
This takes into consideration the value of similar businesses that have recently been sold off. This method is useful only if there are sufficient cases using which comparative value can be determined.
Benefits of business valuation
* Determine the right value of a business, its assets and liabilities.
* In case of a resale, business owners can have a good idea of how much will they get if they sell-off the business.
* For mergers/acquisitions, you can negotiate properly and be at an advantage of bargaining.
* The correct business valuation helps in making informed decisions about investments in a venture.
To eliminate the ambiguity and address your concerns about business valuation, the experienced team at MI CAPITAL can assist you with expert advice.
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