The Business Valuation Processes
Business valuation is basically a technical process and a group of methods applied to assess the current economic value of an interested owner’s stake in a company. Financial market participants use valuation to determine the asking price that they are ready to pay or get to induce a sale of a company. While business valuation has become one of the main approaches for valuing enterprises, there are two major problems with its widespread application: it is highly subjective, and consequently, widely inaccurate. In addition, the valuation of a small-scale business may not provide valuable information on the larger scale firms. This has led to an increasing use of market data sources and market research companies that specialize in assessing company values.
The three major ways in which business valuation has been applied include the exercise of contractual rights, the use of financial reporting requirements, and the use of bank statements and dividends payments as part of the valuation. A few firms have developed their own proprietary techniques. However, all these methods of business valuation involve the use of market information sources that are not necessarily independent, and as such, have been criticized for their inability to accurately represent the true value of the subject company. Exercising contractual rights is based on the assumption that the value of the stock is likely to increase over time; however, the method of valuation does not take into account the possible changes in company shares in relation to their position in the market, which may affect the value of the stock and hence the valuation of the company.
The financial reporting requirements of accounting standards bodies usually apply to valuing a company by means of the statement of financial expectations. The value is then calculated by taking the discounted cash flow of the business and the fair market value of all existing assets as of the balance sheet date. However, there is the potential for deviation in this calculation from the estimated maximum value due to certain timing related factors, which may influence or penalize the valuation of an asset. These timing-related factors include the amount of purchases and sales made during the year and the period during which the company has been trading. While the gross selling price and the cost of good sold are standard ways of measuring a company’s stock market worth, certain discrete items such as the effect of credit ratings, the amount of debt held by the organization, and the effect of dividends paid by the corporation may be used in computing the value of a company.
There are also many other valuation methods used in business valuation, although not all companies use them. These include the income and cost of capital and current and long-term cash flows. Although most businesses use the method of cash flow valuation, it is sometimes important to use other types of market value in order to accurately measure the value of the company’s tangible assets.
One of the most common valuation methods used in business valuation is the Waccum Analysis, which has two measures of valuation: Waccum Spread and Waccum Price. The Waccum Spread measures the profit that could be obtained if the shares were sold in an active market. The Waccum Price measures the total selling price of the stock. Both measures will be considered valid if the business is able to sell its existing stock within the specified time frame, based on historical data. This type of valuation, though, is not used to value intangible assets of a non-generally applicable nature because it is not directly dependent upon the type of assets sold.
There are three other important business valuation methods that are not commonly used in business valuations: the income, fair market value and implied economic value. Fair market value is often called FICO score because it uses numbers to represent a company’s worth rather than a numerical measurement such as the price per share or the price per product. The FICO score calculates the overall perceived value of the company by considering different aspects of the business’s financials such as current assets, current liabilities, and long-term assets. This method is also not considered a true asset-based approach because it does not take into account intangibles like the founder’s reputation.
For our business valuation clients at BizAnvil, we provide a complete big-data powered analysis with comprehensive details and a full 30 page report on the value of your business. Our cloud platform is powered by BizEquity algorithms and provides a four level valuation that provides your business’:
- Equity Value
- Asset Value
- Enterprise Value
- Liquidation Value
We’ll review these calculations with you in our presentation and you’ll have all you need to take it to the bank, or private investors, or to calculate your insurance needs, etc..
So WHY would a business owner need a business valuation?
Reach out today and let the Success Team at BizAnvil help you with an AI powered, big-data enabled, cloud-based collaborative business valuation. Call us at: 337.329-8080 today!