Business Valuation

What is Business Valuation?

At BusinessOptions, we define Business valuation as the process of determining the economic value of a whole business or company unit. Business valuation is used to determine the fair value of a business.

A business valuation might include an analysis of the company's management, its capital structure, its future earnings prospects or the market value of its assets. Owners will often turn to professional business evaluators for an objective estimate of the value of the business.

Methods of Business Valuation

There are multiple methods for valuation, however following 3 approaches are commonly used.

1. Market Capitalization

Market capitalization is the simplest method of business valuation. It is calculated by multiplying the company’s share price by its total number of shares outstanding. For example, ABC Ltd. traded at $86.35. With a total number of shares outstanding of 7.715 billion, the company could then be valued at $86.35 x 7.715 billion = $666.19 billion.

2. Earnings Multiplier

Earnings multiplier may be used to get a more accurate picture of the real value of a company, since a company’s profits are a more reliable indicator of its financial success. The earnings multiplier adjusts future profits against cash flow that could be invested at the current interest rate over the same period of time. In other words, it adjusts the current P/E ratio to account for current interest rates.

3. Discounted Cash Flow (DCF) Method

This method of business valuation is similar to the earnings multiplier. This method is based on projections of future cash flows, which are adjusted to get the current market value of the company. The main difference between the discounted cash flow method and the earning multiplier method is that it takes inflation into consideration to calculate the present value.

Apart from the above, other valuation methods include Book value method, Liquidation value method, Times Revenue method etc.

Business Valuation in Franchising

Franchise agreements generally define how a franchise can be sold, and these vary by franchise vendor, so check your franchise contract. Some contracts stipulate that the franchisors will buy back your franchise directly for a fixed price. Others assist with valuation and locating a buyer, as it is in their best interest to make sure that the business continues uninterrupted.

The most obvious reason to value a franchise company is to facilitate negotiation over the purchase and sale of the business. It is imperative on both the vendor's and purchaser's side to have an accurate valuation in order to facilitate constructive negotiation

Business Valuation when Buying or Selling your Business

Anyone considering a business sale faces the first question: How much is my business worth? Both sides of a deal will have different views on the worth of a company. Assigning a monetary value which is acceptable to both parties is as much art as it is science. However, there are many well accepted ways in which businesses can be valued which include Market Capitalization, Earning Multiplier and Discounted Cash Flows.

One of these exercises can give you the proper asking price. Your asking price needs to account for the fact that buyers negotiate downward. Your asking price will need to account for that variance without stating a number so high that it reduces buyer interest and inquiries.

Companies are compared using the enterprise value instead of equity value as debt and cash levels may vary significantly even between companies in the same industry. During an acquisition or sell, depending on whether it is an asset purchase or a stock purchase, valuation of appropriate elements of the business needs to be carried out.

How much is your business worth - Business Valuation Tool

Find out your company's worth using our online valuation tool. Select the sector your company operates in and enter basic financial details. We use publicly listed comparable companies to value your company. The graph shows the range and most optimal value of your company using different methods.

The valuation tool provides a quick way to find your approximate business worth. But, you may not be the best person to assess the attractiveness of your business to buyers, which is why outside intermediaries and assessors are so valuable. For a detailed valuation including financial projections you can get it from the Certified Business Valuers at BusinessOptions.in.

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