Knowing the value of a company may seem complex and technical, but it’s as important as knowing how much money you have in your bank account; you can’t really transact or have that financial peace of mind without knowing what you have (or don’t have)!
Irrespective of whether you’re seeking to sell, divest, invest and acquire a new company, or are simply seeking growth strategies to add value to a company, estimating your company value is essential.
There is no ‘right way’ of assigning a price tag to your firm, although one could surely come up with several wrong ones…
Ultimately, the biggest factor is how much a prospective buyer is willing to pay for it.
So if you’re planning to buy, sell or take a business decision about your company, my advice would be to approach a financial consultant and get a professional valuation done.
However, here are some possible valuation methods to help you on your way:
1. Asset Valuation
The simplest way to value a company is by looking at the asset value.
This means no other than getting your hands on a copy of the latest financial statements and looking at the net book value of the company, a.k.a the balance sheet total i.e. total assets less total liabilities.
This approach looks at the value of the various assets, be they land, buildings, equipment, stock etc. vis-à-vis any pending debts, be they loans, creditors, tax dues etc.
Such a method is, therefore, a quick, straightforward and readily available source of value that one can easily arrive at.
It is good to keep in mind that these values may not take depreciation, inflation or appreciation into account, especially in terms of the value of any land, so make sure your assets are valued at current market rates to give you the most accurate picture.
2. Earnings Valuation
One other possible method is valuing the earning potential of the company.
Cash is the single greatest determinant of the value of a company (yes, more than profit!), so if you think of your company as a stream of cash, placing a value on that stream will help you arrive at the value of your company.
Using this approach, one takes a historical look at the past earnings of the company, normalises any unusual revenue or expenses (as these can skew the numbers), and identifies a trend to forecast future earnings.
To give these future earnings a value in today’s terms, they are discounted to present value using an appropriate discount rate.
Naturally, this rate is an essential part of the calculation and can vary the price of business considerably.
As a result, a great deal of thought goes into the calculation of an appropriate discount rate as one must consider the return on equity, debt, interest rates, tax charges as well as industry-specific factors rates.
It might sound complex, but in practice is one of the most popular and accurate valuation methods.
When you think about it, it’s fairly simple – how much cash has your company generated and how much will it generate in the future?
3. Market Valuation
No company operates in a vacuum and is sure to have some competition out there.
Market valuation approaches attempt to place a value on your business by comparing it to other similar enterprises in the market that have been recently sold.
Obviously, this approach works best if there is a sufficient number of other businesses to compare.
It’s no secret that, given our size, finding the value of a recent sale of a similar business can be tricky, especially since such information may not be publicly available.
Similarly, one can look at publicly-traded comparable businesses.
In this case, the basis for determining company value is computed by taking the value of the company’s shares being traded.
Although each of these valuation methods has their merits, taking a combination of two or more methods can be a fairer way to set the transaction price when buying or selling a company.
Lastly, while these 3 techniques – asset/earnings/market valuation – consider the financial element, non-financial considerations play an important role.
One must consider important aspects of any business such as the potential for growth, market saturation, brand and reputation, the existing market share, the location/s of the establishment, the workforce, the management team, the investment in training, the corporate culture, amongst many others.
Ultimately, everything has a price, but like so many things in life, what you’re willing to pay is another question altogether.
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