Business valuation is a procedure for calculating the value of a company, business, or their share. With the help of business valuation, any manager can make the right decision on the sequence of development of his enterprise.
Business valuation is the definition of non-market or market value of a business as an integral complex of property. It is also an assessment of the right to make a profit. When evaluating a business, they determine the company's performance, its effectiveness, forecast revenues, analyze the market and the competitive environment.
Company or Enterprise Appraisal
When assessing the value of a business, many factors are taken into account; for various organizations, various indicators are evaluated. For example, for an industrial enterprise (plant, factory), the value of the property complex is estimated. For companies that are engaged in the service sector or trade, the priority is the assessment of their income.
Company valuation is required when:
- partial or full sale of the company;
- in creating a business plan;
- company restructuring;
- conducting various operations with the assets of the enterprise;
- insurance operations;
- obtaining a loan for business development;
- revaluation by the company of assets in accounting;
- issue of assets;
- taxation;
- determining the creditworthiness of the company;
- determination of rents when renting a business;
- relevant court decisions;
- making various management decisions.
Assessment of the business value of an enterprise is carried out in the following categories:
- minority and majority stakes in the company are evaluated. This task gives the most complete picture of the value of a large block of shares or the business as a whole;
- the property complex, company assets, as well as financial flows of the enterprise are evaluated;
- shares of the company quoted in the market are estimated.
Business Valuation Methods
There are 3 methods for assessing business value: profitable, costly and comparative. When this analysis is carried out, choose the method that gives the most clear assessment.
The cost method is used taking into account the costs incurred. The advantages of this method:
- based on existing assets;
- suitable for evaluating enterprises, investment and holding companies that have just begun their activities.
The cost method does not take into account the prospects of business development - this is its drawback.
The liquidation cost method, as well as the net asset method, are components of a costly approach.
The income method is carried out by calculating the present value of the expected profit. The underlying factor to be considered is income and profit. The more the company’s income, the higher its value.
This method is the most popular and common, based on future profits. With it, an assessment of the value of a business reflects the results of an active company.
Comparative method provides for the analysis and comparison of the business that is evaluated, with competitive enterprises that operate in the market. Information for this method is drawn from open stock markets, previous transactions with business assets, and the absorption market.
Business benefits
For any enterprise, business valuation has the following advantages:
- can increase the efficiency of company management;
- competently develop a business plan;
- make an informed investment decision;
- easy restructuring of the enterprise;
- Get information about the market value of the company;
- redeem shares from shareholders;
- get balanced taxation;
- determine the value of shares in capital, securities.
Factors that determine market value are future and current profits, the cost of creating a company with assets, the ratio of supply and demand, the degree of business control, and others.
Business Valuation Process
Valuation of a business enterprise is carried out as follows:
- analysis of the market in which the company is actively operating;
- collection of necessary information about the evaluated object;
- calculation and coordination of results using business valuation methods;
- report and interpretation of results.
Company valuation - determining the value of the estimated block of shares. The package may be majority, minority, controlling and blocking, depending on the number of shares. Valuation is carried out for enterprises with any type of stock.
The liquidity indicator (the quality of securities, which characterizes the possibility of their sale) affects the value of shares. The high cost of a security depends on high liquidity.
Valuation of shares mainly determines their value, the ability to bring profit to the owner. Indicators such as net assets, dividends, capital market help evaluate stocks.
Market value of shares - a certain price at which the object of analysis and evaluation can be presented in a market with a large number of competitors.
Business valuation services are mainly provided by specialized companies offering their strategies in this matter. A wide range of services allows you to carry out many actions, thus evaluating:
- property value;
- intangible assets (licenses, trademarks, technical documentation);
- value of securities;
- cost of goods;
- the cost of equipment and machinery.
Carrying out an assessment, determine the market value, as well as other types of value (investment, collateral, insurance).
When determining the value of a business, the appraiser calculates the value of the assets and liabilities of the enterprise. Assets include any movable and immovable objects, equipment, financial investments, cars, goods, cash reserves, employee qualifications, intellectual property (brands, trademarks), business reputation. Liabilities are different debts and unliquidated obligations of the enterprise.
In assessing and analyzing the value of a business, several approaches are used, therefore, the assessment in the end is as accurate as possible.
