Is it possible to commence a business or project without a SWOT analysis? Have you ever thought about the value of your company? The reality is that life is unpredictable, and there is nothing we can do about that. However, we can prepare for unexpected moments such as the death of a founder or liquidation of the business.
Business valuation is simply the process of determining the economic value of a business. It entails evaluating a company’s financial worth by looking at its assets, liabilities, cash flow, profitability, market position and growth potential among other things. The primary purpose of business valuation is to provide an estimation of how much a business or company is worth.
Valuation methods can vary depending on the nature of business and purpose of valuation. Some common approaches include:
1. Market-Based Approach: This method compares the business to similar companies that have been sold recently or are publicly traded. It considers factors like price-to-earnings ratios, market multiples, and transaction data.
2. Income-Based Approach: This focuses on the company’s earning capacity. It involves projecting future cash flows and discounting them back to their present value using an appropriate discount rate. The discounted cash flow (DCF) analysis is a commonly used technique within this approach.
3. Asset-Based Approach: This method determines the value of a business by assessing its net asset value. It involves calculating the net worth of the company’s assets after deducting liabilities.
Business valuation is carried out on an unquoted company for the following reasons:
- The company might be converted into a public limited company with the intention of launching it on the stock market. When a company comes to the stock market for the first time, an issue price for the shares has to be decided.
- When shares in an unquoted company are sold privately, the buyer and seller have to agree on a price. The buyer has to decide the minimum price he is willing to accept and the seller has to decide the maximum price he is willing to pay.
- When there is a merger involving unquoted companies, a valuation is needed as a basis for deciding on the terms of the merger.
- When a shareholder in an unquoted company dies, a valuation is required for the purpose of establishing the tax liability on his estate.
In conclusion, valuation gives an insight into the structure of a business.