business valuation approaches

All Business Valuation Approaches in Simple Words

To transact in today’s marketplace you need to have a clear understanding of your company’s value. There are many valid approaches to making a valuation of a company in the market, each of which has its own characteristics. We suggest you get acquainted with the main business valuation approaches, which will help you better understand the process of making a valuation of the company and its value for further promotion.

How to correctly value your business?

Business valuation is a comprehensive assessment of a company’s assets that determine its market value and its value to the market. Company valuation compilation can be used for the entire company or for its individual structures. Further on the valuation of the company may be used as one of the key features of the company during the transaction.

Various methods and ways of valuation are used to promote business in the modern market. More often a method of company valuation is used for this purpose. Such appraisal is necessary for a company or potential investors to assess the presence and size of the company’s available assets, as well as to determine the prospects of their use for further development. The valuation of a company contains information on tangible and intangible assets, which determine the market value of the company.

The result of the transaction often depends on the valuation of the company. Therefore, in order to leave a valuation of the company, it is necessary to use a comprehensive approach that will help you evaluate the assets of the company and make a realistic assessment, which may later become the basis for evaluation of the company’s prospects for further development.

How to value a company based on revenue: a few basic methods

Several methods are used to estimate the value of a company. Among them, the most popular are:

  1. Assessment of the market value of the company. A comparative-analytical approach is used for drawing up a market value, where a company’s assets are compared with similar indicators of already sold companies. This method can hardly be called objective because all comparisons will be approximate.
  2. Valuation of the company’s assets. A more accurate assessment of a company’s value can be obtained by analyzing the size and condition of its assets. And tangible and intangible assets are used for evaluation, but only the net assets minus the company’s liabilities are used for evaluation.
  3. Evaluation of return on investment. The main thing in this method is to evaluate the profitability of the company, as well as the return on investment from the potential investor. In order to make a valuation, it is necessary to consider not only the state of the company’s assets but also market trends and the company’s development prospects. This method also cannot be called accurate, because the results will be approximate.
  4. Evaluation of cash flows. For this method, the main thing is to estimate the company’s possible income that a future investor or buyer can get. It can be used if the income will not be stable after the reorganization. Although the method does not seem reliable enough, its data is quite accurate and can be used to make a realistic value estimate.

These approaches to compiling a company valuation are not the only ones, but they are most commonly used for transactions. Some experts advise using the services of independent consultants to prepare an accurate estimate of a company’s market value.