Business Valuation is a phenomenon to estimate the true value of the owner’s interest in the business in economic terms. The same is done by the financial participants to know the accurate price or value while they are willing to sell or purchase the business.
Need For Business Valuation
Several business tools are used to do business valuations to resolve disputes, litigations, separations, shareholder’s deadlock and estate contests. In addition, the business valuations are also used to determine the value for Mergers and Acquisitions, Disinvestment, & Corporate Takeovers, Fresh Loans from banks and other financial institutions, Structuring and restructuring of bank loans, new investments, real estate project valuations, business take-over, buyouts and so on. This not only helps to determine the present status but also the future prospects of a company, which in turn provides an understanding of how the corporate value & shareholders’ wealth could be maximized.
Understanding the Reasons For Valuation
Before any valuation is done, the reasons and circumstances for the assignment should be well known. These are formerly known as the business value standard and premise of value.
Standards of Value is the hypothetical condition under which the business should be valued (Key parameters: Fair Market Value, Investment Value and Intrinsic Value).
Premise of value relates to the assumption that the business will continue as going hassle, or that the value of a business lies from the sales of all the assets minus related debt (Fair Value in case of Orderly disposal, Liquidation or Assemblage of Assets).
What are the Main Approaches for Valuation?
Apart from the key element of analysing the financial statements thoroughly, the three different approaches commonly used in business valuation are:
- Income Approach
- Asset-based Approach
- Market Approach
Generally, the income approach determines value by calculating the net present value of the discounted cash flow of the business.
The asset-based approach determines value by adding the sum of the parts of the business (net asset value).
The market approach determines value by comparing the subject company to other companies in the same industry, of the same size, and/or within the same region.