Business valuation. Briefly about goals and approaches

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

In the modern world, business valuation is becoming more and more important, as it is simply necessary when making any decisions by the company's board. Any enterprise carries out a business assessment in order to properly plan financial activities and manage it correctly. The application of this type of assessment usually improves the efficiency of the use of resources and provides an increase in the level of control and security. An integrated approach to valuation is to establish the market value of a functioning company, that is, the optimal price at which it can be sold in a competitive market. In addition, the valuation of an enterprise's business may also be relevant to the determination of the value of the enterprise's divisions, its fixed assets or the equipment used.

When should I conduct a business valuation?

Evaluation of the company's business is necessary when substantiating the sale and purchase transaction of the entire business or its share, determining the marketthe cost of collateral for a loan, justification of investments, development of a business plan, the need to justify the tax base, and in other situations.

Any enterprise can become an object of assessment: a small company, an association of enterprises, a structural subdivision of one enterprise, a company with a certain legal form, a bank, and an insurance company. Before deciding on a business valuation, it is necessary to determine the purpose of the valuation. If this is an establishment of the real value of the business, a formal report is usually not required. Making an appraisal report increases the cost of services of appraisal firms and private appraisers.

If we talk about stages, business valuation has a certain algorithm. First, information about the object being evaluated is collected. The second step is related to the analysis and study of the market in which a certain enterprise operates. To do this, it is usually necessary to use as much detailed information as possible about the activities of a similar company. This is followed by calculations based on suitable approaches and valuation methods, after which the results obtained by valuing the business with different approaches are agreed. The last stage is the preparation of a business valuation report. The classical approaches include income, comparative and cost.

Valuing a business using the income approach requires processing information about business income, since the value of the object of assessment will depend on this indicator. The higher the income frombusiness, the more it is worth. At the same time, the appraiser takes into account not only the amount of income, but also the period for which it can be received, as well as the risk that accompanies the process of making a profit.

The comparative approach is used in the evaluation when there are several objects on the market with which the object of evaluation can be compared. The accuracy of determining the optimal cost of a business in this case will depend on the reliability of the data collected about peer companies.

The cost approach is used to evaluate an enterprise that does not generate stable income. It can also be a newly created enterprise, or a business that is in the process of liquidation.

It should be noted that all these approaches are closely related to each other, and in an ideal market, valuing the same business using different approaches will have the same results. However, the market is imperfect in most cases, and more often than not, using three approaches results in three different results.