While there are plenty of reasons for business valuation for sale, the most common purpose is selling/buying.
Since there are many things at stake, a business owner cannot perform a business valuation for sale since he may not be able to remain objective. We need an expert or professional to conduct a business valuation.
What is Business Valuation?
Business Valuation is a process of determining the worth of a company. It takes into account many different factors to come to an accurate conclusion.
A valuation expert or professional will select the correct method from various ones to arrive at the representative value of the company.
Different Approaches to evaluate a business for sale
While there are many reasons for performing a business valuation, a single method is not suitable for all purposes. Hence, we should understand the various methods available to better use them for valuation.
The three important business valuation methods/approaches used while selling/buying a business are,
- Income-Based Approach
- Asset-Based Approach
- Market-Based Approach
Income-Based Business Valuation Approach
Valuation Professionals call this approach the King in Business Valuation Methods. The is the best method to determine the amount of money a company will make in the future.
While using this method, we can analyze the past financial history of the organization to make necessary projections about the company's future profits.
The income-Based Approach contains two different methods,
- Cash Flow Capitalization
- Discounted Cash Flow
Capitalization of Cash Flow
In this method, a business is evaluated by dividing the total cash flow of a business by the business's capitalization rate.
"Capitalization Rate = Reflection of Business and its potential future growth"
While this method is indeed advantageous, it has its own downside. Because it assumes the future cash flow by past numbers.
Discounted Cash Flow
We evaluate a business's worth, by projecting the future cash flows and then subtracting/discounting cash flows back to the valuation date.
Since it is difficult to accurately predict the future. this method is not the best.
Asset-Based Business Valuation
Sometimes, businesses may find the income and market-based approaches difficult. Hence, they use an Asset-Based Approach to evaluate their business.
In this method, we subtract the total liabilities of the company from the total fair market value of all the assets to determine the company's value.
"Business Worth = Total Maket Value of All Assets - Total Liabilities"
While this approach is commonly used among real estate and holding companies, it may not be the best one for operating a business.
When valuing the worth of operating a business, it is very important to use a Market or income Based Approach.
Market-Based Business Valuation
In this approach, the value of the business is determined by comparing it with similar businesses whose transaction values are known. This method helps us to identify the accurate worth of the company in the market.
For example, To determine the value of dominos, using this approach one can compare it with its competitor Pizza Hut's transaction values.
"Business Worth = Similar Business's Transaction value"
Comparing businesses can be difficult because of certain reasons like Differences among the comparable companies, private transactions, and different product diversification.
How to Value a Business Quickly - India?
As you can see business valuation for sale is a tedious process and requires a lot of time and resources.
While there are several rules of thumb in business that we can use to determine our company's worth, Some common rules of thumb are
- Evaluating business value by analysing past financial statements.
- Business valuation by comparing similar business transaction values.
- Business Value by multiplying discretionary earnings with a valuation multiple.
Conclusion
While you might think of doing your own valuation, I highly recommend hiring a valuation expert to determine the value of your business for sale.
