Business Valuation: The Most Complete Guide on How to Value a Business Through Updated Financial Valuation Methods

INTRODUCTION

What is a Business Valuation?

A business valuation can also be referred to as a company valuation. It can be defined as the process involved in determining a business’ economic value. As an investor looking for a company to invest in, you need adequate information about business valuation to help you pick the right business for your investment effort. A business with a positive valuation result is a good choice for investment and vice versa. Business valuation involves analyzing all the aspects of the business in focus to help the analyst determine the worth of each of the units or departments in the business to give the overall worth.

Business valuation can be used to determine a business’ fair value. Some of the reasons you may want to know the business valuation of a company are:

Divorce Proceedings: If you want to divorce a partner, you may want to value the partner-owned company to enable you to determine your share of the settlement. Valuing the business helps to prevent fraud by a partner.

Taxations: Valuing your company will help you to know how much you should pay as tax, bearing in mind that the amount to pay as a tax depends on the total value of the business being taxed.

Establishing Partner Ownership: Knowing the net worth of such a business before partnering with a business organization is essential to know where you stand. A valuable business is worth the investment effort and vice versa.

Sale Value: Before selling your company for any reason, the buyer will like to know the business's true worth, which will determine how much will be paid to buy the business.

You may decide to value the business yourself or get a professional to do it if you do not have the required expertise. Even if you do it yourself, you may only get an approximated value of the company’s true worth, which may not be good enough for taxation, divorce proceedings, sales value, or partner ownership establishment.

So, you can use business valuation to determine the economic value of any business category or specific business unit.

Some of the updated financial valuation methods for any business are:

Market cap

Earning multipliers

Book value, etc.

This eBook will enlighten you more on how business valuation can help your business and also open your eyes to each updated financial valuation method.

CHAPTER ONE: THE BASICS

OF BUSINESS VALUATION

Corporate financial sector participants discuss business valuation, considering its importance in wealth building. A business owner can decide to carry out the business valuation of his company to give the incoming investors an idea of how reliable the business organization is. Those looking for businesses to invest in or buy will also want to know the true worth of that business before they risk their money. So, a business valuation will be one of the best assessments you can ever make as a business owner, buyer, or investor.

Business valuation involves assessing the health of that business, which can be obtained by checking its cash inflow. The analysis will also want to compare the inflow with the outflow to know the company’s net worth. The business valuation process will include checking the company’s financial performance across several financial years to determine a progressive or retrogressive pattern.

Business valuation is not limited to just assessing a company’s financial performance; the analysts will also want to check the company’s capital structure, management, earnings prospects for the future, and assets’ market value. Note that these factors are interrelated. For example, the company’s management quality can determine its future earnings prospects. Poor management gradually reduces the earning potential of a company. In the same vein, its capital structure can determine its market value.

You will find several business evaluators today, each adopting different approaches to business valuation. Some of the methods adopted by the business evaluators are:

The company’s financial statement

discounting cash flow models

Similar company comparisons

Comparing the company with other related companies helps investors determine where the company of interest is heading and can help investors make decisions.

The Internal Revenue Service (IRS) requires the valuation of businesses based on their fair market value, which can only be obtained via business valuation. The valuation of a business will be based on the gifting of shares, purchase of shares, and sales of shares by the company, all of which contribute to the total value of the business in question.

The first step to take regarding business valuation is the purpose of the valuation. You should also determine the standard of value you need to apply. This will affect the approach selection, assumptions, and inputs to be considered in the said valuation.

Why Should a Business Valuation Be Conducted?

The following are some of the reasons for business valuation:

Portfolio Valuation and Management

The category of investor in a business can determine its portfolio management; a long-term investor has a small portfolio management valuation, and the reverse is the case for a short-term (or active) investor. The short-term investor sees business valuation as crucial before making investment decisions regarding the business in question. The investor should compare the value derived