Maintaining the aspects of a business in entirety is quite challenging. To know all the objectives of the business, and to assess its value in the market is termed as Business Valuation. It is also a measure for determining the company’s economic value. To know the complete details of a business, this kind of a valuation is a need.
While evaluating a business, will include the analytics of a company’s management, capital earnings, the market value of assets, and the future of the business in the market.
The need for business valuation:
The business needs to valued at times of starting a new business from an existing old business, to enter into partnership contracts and also if a business has to be dissolved. The management will take the help of professional evaluators for this purpose.
The different methods of business valuation are:
- Times revenue method: in this method, the stream of revenues in a certain term period is applied to a multiplier depending on the economic and industry perspective and situation.
- Book value: by analyzing the value of equity of a shareholder, this method is used to find the business value. It is calculated as the difference between the current assets and current liabilities which are present in the balance sheet statement.
- Discounted cash flow method: this method operates on the projections of future cash flows which operate in the current market situation of the company.It takes the inflation factor into account while calculating the value of the business.
- Market capitalization: the simplest method of business valuation which is calculated by multiplying the company’s share price with the number of shares outstanding.this is a quick method and can be a very crucial factor to know the value of a business.
- Earnings multiplier: this method of valuation an accurate measure of the company’s value in terms of its sales revenue.here the future profits are adjusted against cash flows to predict the business value of the company.
- Liquidation value: this is simple and easy to calculate. The value at which the assets are liquidated or changed into cash so that the liabilities can be paid off on that day.
These are the basic valuation methods but there could be many more according to the business dimensions.Another factor which needs business valuation is tax reporting.the internal revenue system requires a business to be valued in terms of its fair market value.