Try These Common Business Valuation Methods
- BY Jaspreet Kaur
Feature Writer, BusinessEx
- Oct 22,2020
- 15 Mins Read
Owing to the pandemic, business failures have become a common place in every industry. Before closing down the shutters, entrepreneurs can look for sellers and transfer their business to new owners. In this crisis, selling one’s business is the best option as it disposes of liabilities and credit of the business owner. However, before exiting the business, it is important to plan it safely.
Prior to deciding an asking price, it is important to know the actual valuation of the business. Business valuation is an integral part while selling a business. An entrepreneur has to consult an accountant to calibrate business valuation. At present, there are various business valuation methods available in the market. They are contingent on several factors, thus, helping estimate the right price of a business.
Before jumping straight to business valuation methods, let's understand what business valuation is.
Primarily, business valuation is an intricate process wherein the market worth of an enterprise is assessed. Every business valuation method assesses a business thoroughly including its equipment, assets, liabilities, and inventory etc. Other elements that are considered into the business valuation process are management, structure, revenue, sales and yearly earnings. Apart from selling the business, there are various occasions when an entrepreneur has to estimate actual worth of his business. Merging or acquiring a new business, financing the business, creating partner ownership percentages, adding stakeholders into the business, and paying off taxes are some of the events when business valuation is prerequisite for a business owner.
Coming onto business valuation methods, there are plenty of methods available. An entrepreneur along with a consultant has to ascertain an apt business valuation method depending on the situation. It is natural that one method would be beneficial for others; therefore, a careful examination is needed to comprehend these methods.
Considering the Market Value
This business valuation method is personalised as factors are contingent to the market situation. In this method, an enterprise's valuation is calculated by comparing with its competitors that have been sold lately.
This method particularly works for businesses that have access to market data relating to its rivalries. The market data helps make a suitable decision and come upon an apt price. It is difficult for entrepreneurs that are solely handling their business.
Further, the method is essentially based on negotiation that takes place between seller and buyer. If the entrepreneur persuades the buyer, then the business valuation will rise or vice versa.
Assessing the Assets
In this business valuation method, a consultant takes an account of the number of assets of a company. Assets are totalled against liabilities; the result after deduction comes as the actual value of the business. Within this method, there are two types of sub-methods. Firstly, if the business is running presently, then it has to aggregate assets and deduct it from liabilities.
Secondly, when the business is not running, then assets along with other equipment turn liquid. Herein, the value of the assets would be lower than the current market value as the company would be closed. It is employed when the situation demands urgency as this valuation method does not include much formulas.
Calibrating the ROI
In this business valuation method, a company’s value is assessed by its profit’s margin. Secondly, it considers the return on investment (ROI) that an investor will receive after taking hold over the business. Investors generally consider this method as they seek to know the ROI of the business if they infuse money or purchase it.
A high ROI is ultimately contingent on the market, thus, there need to be a favourable market situation. Under this method, a business owner also needs a lot of information to persuade an investor or buyer to take interest into the business. An outsider would invariably interrogate a set of questions such as time needed to recover the business, expected amount of ROI initially, and achieving business goals. Responses to these questions are needed to estimate the ROI aptly.
These are commonly used business valuation methods. Apart from these, there are some other business valuation methods as well. Every method is usable depending on a particular situation. Therefore, it is crucial to let accountants or consultants select a suitable business valuation method as they hold immense practice and knowledge in this arena.
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