Business valuation entails the methods of determining the economic value of a company. Before investors conduct a valuation of your firm, they will check its brand, markets, products and history. These items are then translated into monetary value.
Business valuation provides important information to investors, creditors, owners and bankers. The results of business valuation vary according to the objectives and the process. Valuation is mostly an intrinsic process. It deals with the performance of a company rather than its pricing.
When negotiating the sale, mergers and acquisition of your business with investors, valuation is fundamental. It determines the percentage ownership by shareholders and partners. If you are looking at acquiring finances from creditors and lenders, valuation is one of the conditions. In addition, you will need the valuation for the stock ownerships of your employees.
Most investors and business owners use this method for companies already generating profits. The method determines the actual present value of a company. Getting the current value of your business is vital for projecting future earnings, profits or losses. Using this method, an investor will get the expected potential risks based on the discounted rate. The profits will be less if your business has a higher discount rate. Your business will therefore have a lower value and greater risk to investors.
Depending on the nature of the business, an investor will use cash flow, earnings and dividends. The investors will use the method to project the business value for the next five years. In addition, the terminal value of your business will be established.
Book value is also known as the net asset method. When using this method, investors the market value of a company’s asset and deduct the liabilities. Lenders and investors will use this method if your business is young or with limited financial history. Furthermore, the net asset method is important when determining the lower limit of the valuation range. Book value calculations are based on the tangible assets of a company.
Lenders and investors will prefer this method if your business is distressed or struggling. It is also an important method of determining the liquidation value of a young company.
Investors use market value to estimate the value of your business at a given time. Investors compare firms in the same industry and level when using market value. The most common method of calculating such value is using the price-to-earnings ratio. The disadvantage of this method is that it doesn’t filter out errors from the market.
Investors perform in-depth analysis and estimates for investment strategy and philosophy. When value investors conduct valuations, they look at the market and stock value. The report is useful in determining the difference between a business price and value. It is believed that the price will be the same as the business value in the long run. On the other hand, price investors perform technical analyses to gauge the market trends of stocks. The information allows the investors to move ahead of the trends.
Market investors relate the market and value as the same. They select certain stocks that enable them to advance and outperform the current market. In addition, market investors use index funds and other passive investment methods.
Investors use certain elements to find the value of potential investments. These elements are:
Most investors confuse valuation with pricing. Unlike pricing, valuation fails to factor in the demand of a commodity. When dealing with investors, consider having valuation know how to get a good deal. Contact industry players, consultants, advisors and board members must be contacted before engaging with investors. When negotiating with investors, ask for a higher value than the one quoted. Provide evidence to your investors on how your deal is reasonable.
When negotiating with investors, indicate why your business has a high potential exit value. Remove any obstacles or gaps that might affect your valuation. Perform extensive research and contact valuation specialists. Wiley Financial offers expert business valuation, allowing you to have a good deal with investors. Contact Wiley Financial for the best advice and valuation of your business.