Increasingly, funds are being invested in businesses with a view to reselling/buying or merging with other organizations for profit. And then the question arises: “What are the best ways to value a company?”.
The Best Way to Value a Company
In the 21st century, starting a business from scratch is a rather risky and troublesome business. It’s hard to take an idea and turn it into a profitable business. In some cases, it is easier and faster to buy an already operating company. But it’s not as easy as it seems at first glance. Often there is a conflict of interest, which requires a methodology for assessing the value of an existing business. It should be quite simple and understandable and at the same time suit both the buyer and the seller.
The purpose of running a business is to increase its value, and you can find out how much it costs only by conducting a professional assessment of it. Determination of the market value is carried out by independent appraisers. First of all, let’s deal with the types of business valuation. Different classifications give us different types of value, but I decided to focus on the basic ones. By the way, each of the types has its own purpose and objectives for business valuation, then you will understand why this is necessary.
The task of assessing the value of a business arises at different stages of the development of an enterprise and never loses its relevance. In this regard, we want to remind our readers of the methods for assessing the value of a business enterprise, the most commonly used in practice. The net assets method is used when the company has significant tangible assets and it is expected that the company will continue to be a going concern. Net assets are the number determined by subtracting from the number of assets, the amount of liabilities of the company.
What Should You Know About Company Valuation Models?
A business (enterprise) is a complex, multifaceted object, therefore it is evaluated comprehensively. The appraiser needs to consider it according to several criteria. Their set is well defined and includes the next company valuation model:
- Organizational form. The business valuation includes both the valuation of the company’s shares and the shares of an LLC, which means that it is carried out according to the same methods, but taking into account the specifics of the organizational form.
- Property Complex. The value of an enterprise is directly proportional to the volume of its property (assets). The property complex includes not only material values but also intangible assets. Real estate, equipment, vehicles, intellectual property rights, goodwill, cash, finished products, etc. are appraised.
- Company structure. When analyzing a criterion, the evaluator considers spatial and production characteristics. It takes into account not only the number of offices in the regions and the country but also analyzes the presence of divisions within the enterprise. There is also a positive relationship between the growth of the stock market and the growth of purchasing power of the population.
- Sources of cash, cash flow. The financial activity of the enterprise can be supported by external and internal sources. Their ratio affects the stability, solvency of the business and, therefore, its value.
- Business reputation. Goodwill is made up of many factors, but ultimately it is an important indicator of the quality of goods and services.