What Is a Business Valuation? – Everything You Need to Know
Business valuation is the general process of determining the economic value of an entire business or company unit. We can use it to determine the fair value of a business for various reasons, including the value of the sale, selecting the ownership of the partner, taxation, and the process of divorce. Owners often turn to professional business appraisers for an objective business value assessment.
In fact, The theme of business valuation is much analyzed in corporate finance. This process usually occurs when a company tries to sell all or part of its operations or merge or acquire another company. Business valuation is the process of determining the present value of a business, using objective measures, and evaluating all aspects of the business.
It may include an analysis of the Company’s management, its capital structure, future profit prospects, or the market value of its assets. Valuation tools can vary by evaluators, business, and industry. Common approaches to business valuation include reviewing financial statements, cash discount models, and company-like comparisons.
Also, valuation is important for tax reporting. The IRS requires that businesses value at fair market worth. According to the valuation, some tax-related events will tax, such as the sale, purchase, or gift of company shares.
Valuation Forms
Market Capitalization
Market capitalization is the elemental form of business valuation. How to calculate it? We can multiply a company’s stock price by the total number of shares. For example, as of January 3, 2018, Microsoft traded at $86,35.2, with $7.715 billion. The firm can then worth at $86.35 x $7.715 billion = $666.19 billion.
Times Income Form
According to the revenue business valuation method, the revenue stream generated overtime applies to a multiplier depending on the industry and economic environment. For example, a tech company could be worth three times revenue, while a service firm could be at 0.5x revenue.
Profit Multiplier
Instead of a time revenue method, a profit multiplier can get a more accurate picture of a company’s actual value. A firm’s profit is a more reliable indicator of its financial success than sales revenue. In addition, the profit multiplier regulates future earnings about cash flow; This is possible at the current interest rate over the same period. In other words, it holds the current P/E ratio based on current interest rates.
DCF Form
The DCF form of evaluating a business is similar to a profit multiplier. This method means that future cash flow projections are adjusted to obtain the Company’s current market value. The main difference between the discounted cash flow method and the profit multiplier form is that it uses inflation to calculate the present value.
The Value of the Book
This is the value of the shareholders’ equity of the business in the balance sheet statement. The carrying amount is derived less from the Company’s gross liabilities than its total assets.
Liquidation Cost
Liquidation cost is the net cash that a business will receive if its assets are liquidated, and its liabilities are settled today. This is an exhaustive list of business valuation methods used today. Other forms include a replacement, disassembly cost, asset-based valuation, etc.
Business Evaluation and Accreditation
In the US, an accredited business appraisal is a professional designation given to accountants, such as CPAs specializing in calculating a business’s value. The American Institute of Certified Public Accountants commands the ABV certification. Requires candidates to complete the application process and pass the exam. Also, meet the minimum requirements for business experience and education and pay a certificate fee.
Conclusion
Maintaining an ABV certification also requires those who hold the certification to meet minimum work experience standards and lifelong learning. Also, successful applicants can use the ABV designation with their names. This can improve job opportunities, professional reputation, and pay. In Canada, Chartered Business Valuator is a professional designation for business appraisal specialists; provided by the CICBV.
