Business valuation is a process and a set of procedures used to estimate the economic value of a business or a company. Valuation is used by financial market participants to determine the price they are willing to pay or receive to affect a sale of a business. Besides of estimating the selling price of a business, the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establish a formula for estimating the value of partners’ ownership interest for buy-sell agreements, and many other business and legal purposes such as in shareholders deadlock, divorce litigation and estate contest.
Business Valuation Methods
There are a lot of factors that are taken into consideration in order to determine the worth of a business, from the economy’s current state to the balance sheet. In addition, the valuation assignment must specify the reason for and conditions surrounding the business valuation. These are formally known as the business value standard and premise of value. The standard of value is the hypothetical conditions under which the business will be valued. The premise of value relates to the assumptions, such as assuming that the business will continue forever in its current form (going concern), or that the value of the business lies in the proceeds from the sale of all of its assets minus the related debt.
There is a variety of business valuation techniques that are used for determining the fair price of a business. Some of these techniques are the Asset based approach, Earning value approach, and the Discounted future earnings.
The asset based approach sum up all the business investments and it can be performed on a liquidation or going concern basis.
Liquidation is taking place when a business is terminated. Liquidation estimates the net cash that would be received if all assets were sold and liabilities paid off.
Going concern presumes that the business will exist long enough for all the assets of the business are utilized to the fullest. A going concern asset based approach records the business net balance sheet value of its assets and deducts the value of its liabilities.
Earning valuation approach is predicted on the notion that the true value of a business lies in its ability of generating wealth in the future. The most common business valuation approach includes Capitalizing Past Earning.
Discounted future earnings is another business valuation technique which involves using an average of the trend of predicted future earnings rather than an average of past earnings and is then divided by the capitalization factor.
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