How Exactly is a Business Valued?

Valuing a business is not something that happens only when an owner is looking to sell and move on; there are a variety of potential reasons behind it. They may be looking to raise some equity capital, in which case a price for shares will need to be established, or similarly the business might be looking at creating an internal market for its shares. Sometimes valuation might come about simply as a tool for evaluation and motivation – it can help illustrate business performance and encourage management towards a goal. Aside from the different reasons, there are also many things involved and many different ways that a business might be valued. Let’s take a look at some of those things here.

State of Play

The first question is the general state of the business. As an example, older businesses might have an inherently greater value, and companies with actual, tangible assets will also benefit. In addition, the circumstances of the valuation itself can have an effect; a business that needs to be urgently sold will be far less valuable. This is all something that the experts doing the valuation will look at and take into account prior to looking at the financials themselves.

img1Facts and Figures

When it comes to the figures, there are many different techniques available, and again, the experts will decide which ones are most appropriate to use. It’s also important to note that some will have specialist training in valuing certain types of companies; not all analysts will have the same training. Some of the major techniques include:

  • Assets – This, quite simply takes a look at the solid, tangible assets that the business owns, such as property and equipment. Some business types are clearly much more likely to benefit here than others.
  • Price / Earnings Ratio – This is the ratio of the current share price of the business, compared with the earnings per these shares.
  • Entry cost – This looks at how much it would cost to start up an entirely new business of a similar type.
  • Discounted cashflow – This looks towards the future, and at the cashflow further in time. Companies that have invested a lot and are expecting to reap the benefits later on will often be valued by this.
  • Industry guidelines – In certain industries, there are conventions that most experts follow when they’re looking at a business. This might include number of subscriptions to a service or something similar.

There are few hard and fast rules when it comes to valuing a business, because there are so very many different things to look at. It really is something best left to the experts, and it can be very difficult to work things out without having all of the information.

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