Financial analysts use a valuation analysis to estimate an approximate worth of an asset. This could be equity, a business, real estate, or other assets. Analysts use a variety of methods when analyzing different assets. The common denominator is an in-depth view of the underlying fundamentals of said asset.
Key Points for a Business Valuation Analysis
A business valuation analysis will estimate a fair value of a business asset. The valuation process will depend on various methods and models. This is so that the analyst can determine an estimate on inputs or variables. Analysts put in place valuation processes depending on the type of asset considered.
Two main things to think about during this process are the business’s cash flow and the reason for a valuation.
Analysts Combine Art & Science for Their Valuations
Number crunching and assumptions create models to use during the valuation analysis. A value asset is a forecasted value that the asset will produce in the future. These include sales growth, financing choices, capital spending, tax rates, etc. Bear in mind that every asset will differ.
How Do We Use Valuation Analysis for Intrinsic Value?
Now, valuation analysis could be a single entity, or it could be a range of figures. This happens if there are variables that fluctuate. The valuation process plays an important role for investors. This applies when investors need to know the value of company shares to make well-informed investment decisions and continue toward their future goals.
Reasonable values of bonds do not differ much from intrinsic values. This is especially in instances where a business is under financial duress.
Valuation analysis is a handy tool that compares companies within similar sectors. It also compares businesses in the same sector. Valuation analysis is a brilliant tool for estimating ROI over a period.
Why Do We Need Business Valuation?
A business’s economic value is determined during a business valuation process that values the business in its entirety.
Business valuations gauge the fair value of a business for many reasons. They determine the sale value of a business as well as the relevant taxes. Analysts also use a business valuation for the establishment of partnerships. In some instances, a divorce prompts the need for the valuation of a business.
It isn’t unheard of for business owners to make use of professional business evaluators to determine the value of a business.
The Basics of Business Valuation
To begin with, business valuation is often discussed alongside corporate finance discussions. In most instances, a business needs a valuation when a business owner is thinking of selling the company. This could be a portion of the business or an entire business. It could also come into play when a business is looking to merge or for acquisitions of other companies.
The valuation of a business, simply put, is to determine the current worth of a business. During the valuation process, evaluators use objective tools to determine and evaluate all aspects of the company.
Tools to evaluate a business will vary from one business to the next. It is also dependent on the industry and the approach of the evaluator.
What Would a Valuation Typically Include?
A business valuation could typically include analyzing the management of the business. It will also analyze the capital structure and future earning prospects. Business analysis would also include the market value of its assets.
A common approach includes reviewing financial statements, comparisons of similar companies, and cash flow models.
Why Is the Valuation of a Business So Important?
The valuation of a business is important for tax purposes; the IRS requires businesses to be valued at fair market value.
And in certain tax-related events, such as the gifting, sale, or purchase of company shares, they could be taxed depending on the valuation of a business.
Different Methods Used to Value a Business
There is no such thing as a one-size-fits-all method, which is why multiple business valuation methods exist.
1. Valuing a Business Using Market Capitalization
The first and easiest method to value a business is by using the market capitalization method. The company’s share price is multiplied by the total number of shares outstanding to make up a total.
2. Valuing a Business Using the Times Revenue Method
Additionally, the times revenue business valuation method uses the revenue stream generated over time. It is applied to a multiplier dependent on the economic environment to determine the maximum value it is currently possible for the business to have.
3. Valuing a Business Using the Earnings Multiplier
Next, there is the earnings multiplier method to get a more in-depth view of the real value of a business. This is primarily because the profits of a company offer a better idea of its financial standing, more so than sales revenue. The earnings multiplier projects future profits against cash flow that could be invested at the current interest rate over an identical period.
4. Valuing a Business Using Discounted Cash Flow Method
Also, the discounted cash flow method is not dissimilar to the earnings multiplier method. This is based on future cash flow projections, which are then aligned with the current market value of the business. The key difference between this method and the profit multiplier method is that it uses inflation to calculate the business’s present value.
5. Choosing Book Value to Value Your Business
Meanwhile, book value is the value of the equity of a shareholder of a business. The balance sheet statement will show the book value of your business. Book value is subtracting all the liabilities of a business from its assets.
6. Liquidation Value of Your Business
Then, when the liquidation of assets is complete, the liquidation value is the net cash amount, after settling liabilities.
Saddock Wealth Will Find The Best Valuation Options
At Saddock Wealth, our team of financial experts will help you understand all aspects of business valuation and business analysis. We will complete a valuation of your business using the best method to determine the one that fits your needs best!
Schedule a meeting here to discuss your options.