Business Valuation Digging up your corporate attaché Business valuation, in laymans term, means to determine the value of a business. This value can be in terms of Income, Assets or the Current market. Understanding the value of a business is helpful in many ways. It helps to understand the current market standing of the company, brings to light the aspects that need to be worked on to develop the business. It is useful in many areas of the corporate field like Company re-structuring, A, share pricing and many more There are three basic approaches to business valuation Income ApproachIt involves the calculation of the fair market value of the company using the values of cash flows.
Asset Approach It basically means to determine the value of assets of a company or business. It is generally used if the company has to liquidate.Market Approach: It basically involves comparison with competitors. Analyzing your strengths or weakness as compared to your competitors.The various methods for determining value of a business are:Discounted Cash Flow: It uses present cash flows calculated by discounting future cash flows. It basically means to calculate the present value of the cash that the business is capable of producing in the future. The future cash flows are discounted because of the factor of time value of money. The tool used to determine the discount factor is generally WACC.Leveraged Buy-out: The acquisition of a company using debt capital (bonds or loans). The acquiring company can use its assets or even the assets of the acquired company as collateral. Leveraged Buyouts are basically to encourage acquisitions because it does not require much capital investment. The composition of an LBO is generally 9:1 because of which the bonds usually are not investment grade. LBOs initially were not accepted because it led many companies to bankruptcy. This was mainly because of the high interest rates due to higher debt.Comparable Company Analysis: It is a relative valuation method in which companies are compared to the companies having the same market or the same turnover. It involves comparing the companies on the basis of various aspects like Current ratio, PAT, debt equity ratio EV/EBITDA and EV/SALES. The steps include selecting the set of companies to be compared, acquiring the necessary information needed for comparison, analyzing that information and then finally determining the valuation. Precedent Transaction Analysis: Its basic idea is to understand at what rates the similar companies or businesses were sold. It helps in determining their valuation and in turn your company’s valuation.Key factors affecting the value of your business There's a range of key factors that can affect the value of your business. Financial factors like profits and cash flows of the past, present and future, various cost reduction techniques applied External factors like the demand, valuation of companies in similar businesses, interested buyers, number of competitors and many such factors. Intangibles like the Goodwill of the company, the intellectual property rights, capacity of the customers, and growth potential of the business. The value of Assets and Liabilities like property, debtors, creditors, stocks in hand, debt and many more. People working for the company like the management and employees and their performances. Planning these factors properly can help you increase the valuation of business.
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