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Methods To Determine The Valuation Of A Company

Nov 25, 2019 | Articles

There are many ways a business/company can be valued, and some valuation methods work better for different types of businesses. Valuation turn out to be useful if you want to determine your company’s worth or acquire another business as the valuation of a company/business determines the value of business, which is very important to know especially if you’re about to make a transaction. Valuation not only includes analysis of company’s management, but also looks at future earning prospects and latest capital structure.

There are different valuation methods ranging from financial statements to discounting cash flow models. One might even end up using all the business valuation methods that are there. It’s better to speak to a financial advisor if you think it is going to be difficult valuing a business objectively. If you need assistance with business valuation issues, it’s advisable that you hire a business attorney for advice who can help you figure out how best to conduct a business valuation. Also, a business dispute attorney in Florida can help represent your company/business in the event of any legal disputes or lawsuits.

Business valuation may be needed when buying or selling a business, filing for business bankruptcy, for business tax purposes and transferring a business in a will.

Different Valuation Methods:

This isn’t a comprehensive list of strategies, these are just some of the methods used in business valuation:

Asset Valuation– The best way to find out a company’s value is by checking its balance sheet. Your business assets are all the things it owns, such as land and building, cash, supplies, equipment and vehicles, accounts receivable, etc.

Discern The Company’s Revenue Stream– Revenue basically is the amount of sales, and a valuation might be a multiple of the business revenue stream which highlights the importance of discerning your company’s revenue stream. You can use information from a cash flow statement showing the inflows and outflows of cash for your business over a specific period of time. The cash flow method is the best for valuing companies that have shareholders.

Market Value And Capitalization– Market capitalization is studied by multiplying the share price by the number of shares outstanding whereas a market value compares a company to similar businesses that have recently sold. Consider a different method if there’s hardly any competition.

Discounted Cash Flow (DCF) – When it comes to valuation, this is one of the most reliable methods that estimates the value of an investment based on its cash flows in the future.

Seller’s Discretionary Earnings (SDE)- The seller’s discretionary earnings valuation method is used for small companies in which there’s just one owner like a sole proprietorship meaning it’s basically a cash-flow based measure of business earnings in an owner-operated business where the gross profit is reduced by several numbers by adding non-recurring (one-time) expenses, subtracting non-recurring income, adding non-operating expenses such as  personal expenses and non-essential expenses, subtracting non-operating income, and adding Depreciation, amortization, and interest expenses.

Although business valuations may be essential for the company or business, they can also be a source of legal disputes with other parties like insurance companies, creditors and other types of financial lenders, etc. The best way to avoid disputes is by including some provisions regarding business valuations within the company bylaws or operating rules. There would also be written records in the event of a lawsuit. The above-mentioned methods can come in handy for you in focusing on the discussion and getting to an agreement more easily when you go into negotiation with a seller.

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