Determining the value of your business is essential for many reasons. Depending on the valuation needs of different companies there are many valuation methods available today. Read this post to know five popular business valuation methods and their impact on your business.
From selling your company, mergers/acquisitions, attracting investors, to knowing your tax liability, there are several reasons to conduct business valuation. Valuation consultants now use a host of methods to meet the complex valuation needs of different businesses.
Irrespective of whether you hire such consultants or self-evaluate, having a basic idea of the popular valuation methods is essential. Here is a list of 5 of the most popular business evaluation methods along with their impact on your business.
- Market-value-based valuation
The market value method tries to establish a value of your business by comparing it with similar companies that have been sold recently. However, for this method to work, there should be adequate market data available for comparison.
While the market-value-based approach is popular, it is imprecise, and the valuation is mostly based on negotiations if you are looking for investors or planning to sell your business.
- Asset-based valuation
As the name suggests, this method considers the net asset value of your business minus the total liabilities as per the balance sheet to estimate its valuation. This method either uses the liquidation or the going concern approach.
The liquidation method is generally used for businesses that are being sold, and their assets are liquidated. Going concern approach is used when the assets of the enterprise are not being sold immediately.
- Earning value method
With the help of the earning value method, the valuation is predicted based on the future wealth-generating ability of the business. Capitalising past earning and discounted future earning are two of the most popular types of earningvalue valuation methods.
This method is generally not used in case of sole proprietorship as their customer loyalty is often related directly to the business owner.
- Returns on investment (ROI) method
While the ROI is not the most reliable way of evaluating a company, it is still very commonly used along with other popular methods. The net income of the business is divided by the book value of assets to calculate the ROI.
The unreliability stems from the fact that the net income of a business is not an ideal way of measuring corporate performance.
- Multiples of earnings method
Another popular business valuation method is multiples of earnings. Also known as the Times Revenue Method, it helps in calculating the maximum worth of a business by using a multiplier on the current revenue.
The multipliers used for calculation vary as per the industry, current economic climate, and a host of other factors.
Selecting the right business evaluation method
With so many different valuation methods available, it can be difficult for a business to make the right decision. Hence, most companies rely on the expertise of professional valuation consultants.
By understanding the custom needs of a business, such consultants can help pick the right method of valuation. As the professionals have a thorough understanding of the globally accepted practices, they are better equipped to provide a fair and transparent valuation.