How To Value a Business and Business Valuation Resources

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How To Value a Business and Business Valuation Resources

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Valuing the worth of a business from time to time is an absolute necessity. The value of a business is needed the most when you have either a buying or selling interest in the business, or for the benefit of your lenders and creditors. In this article we will study some proven methods to value your business.

Business valuation is usually done by adopting some models or techniques which in turn depend on the cash flow associated with the business. So how well a business is generating returns or profits helps in valuing its worth in the market. Some proven methods of valuing business are: income based approaches, asset based approaches such as adjusted book value method, debt assumption approach, multiplier or market valuation, balance sheet method etc. Here we will discuss some of the commonly used methods only.

Income based approach help in business valuation by finding the NPV of the cash flow generated. Using the discount rate the cash flows generated are converted into present values. Income approaches are usually based on the company’s historical financial data during a certain period. One of the income approaches which is the Discounted Cash Flow method depends on the same but for more than one period.

In DCF method the discount rate which is the rate of return needed for an investment calculates the NPV of cash flows for different period. These are projected cash flows. The discount rate is usually calculated based on the return generated by a risk-free government instrument and the premium associated for risk taking in highly risky investments. Two known methods to find the discount rate are – CAPM (Capital Asset Pricing Method) and the WCC (Weighted average cost of capital) method. Nobel laureates Markowitz, Tobin and Sharpe devised the CAPM.

Asset based method of valuing a business is also equally important as income based methods. Asset based as the name suggests, depends upon the total business parts. This method depends on the adjusted book value of the assets. The rationale is,  a person buying a business will study the book value of all the assets of the business and compare the same elsewhere. Assets are recorded in the company books with depreciation adjusted to it, these asset values are compared with their current fair value in the market. Of course it is difficult to measure intangible assets of the company and that is the main drawback of asset based approach.

Market based approaches depend on the competition of the business. That is, it is based on the stock price of similar businesses which are in direct line of competition with the company.

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