Business valuation refers to the process of determining the value of a business entity or ownership interest therein. It is a tool used to accurately assess the value of any business. Regarded as a special mix of art and science, business valuation is essential for buy/sell agreements, mergers, and acquisitions, estate planning, bankruptcies, and gift tax planning.
Determining the value of any business is a complex process, as there are different methods to determine the market value of an enterprise. Factors to be considered during the business valuation process include business earnings, the nature of the business, the history of the enterprise, the economic outlook in general, the outlook of the specific industry, the book value of the stock, and the financial condition of the business.
The valuation methods depend on the stage of development of the company being evaluated. To be more precise, business valuation methods for early-stage companies are different from growth-stage companies and maturity-stage companies. In early-stage companies, business is valued based on the management's contribution or investment in the form of hard dollars, effort, intellectual value, and opportunity cost. In growth stage companies, it is based on comparable company multiples of sales. In maturity stage companies, the comparable earnings multiples form the crucial aspect. In all cases, company valuation consultants are associated with potential growth and earnings.
Other methods are also employed in calculating the value of a business. They include the multiplier or market valuation method, the asset valuation method, the capitalized earnings method, the owner benefit valuation method, and the return on investment method. The multiplier or market valuation method determines the value of a business using the industry average sales figure as a multiplier.
Another commonly used method is the asset valuation method. It is used to assess the value of assets that will be transferred on the sale of the business. Capitalized earnings method is well suited for service companies and other non-asset-intensive businesses. The owner-benefit valuation method mainly focuses on the owner's benefit. It is used most often for businesses whose primary value comes from their ability to generate cash flow. In the return on investment method, a business is valued through its return on investment.
