Business valuation is more of an art than a science. There is no right or wrong answer when it comes to estimating the value of a business.
There are various models available which will allow you to evaluate the value of a business. However, inputs to these models are based on judgement, which you will acquire from having hands-on experience. The estimated value of a business, when using any of these available models becomes the focal point at which to put a price tag on any business.
Valuation is subjective and depends heavily on how correct the assumptions made by the evaluator are. Hence it is quite easy for the evaluator to be biased when making a valuation. For example, if a evaluator likes a company a lot then he/she may be very optimistic about the future potential of that company. Similarly, if he/she had some bad experience with a company then he/she may have pessimistic view about it's future. Public news about a company can also have some influence of its valuation. To avoid such bias when making a valuation, one should use multiple methods of evaluation and an independent evaluator.
DBA Business Advisors is an expert in business valuation and is happy to offer the best services for most competitive prices, whilst taking into account all the requirements and expectations of every client. We use a variety of business valuation methods to determine a fair price for your business, some of which are briefly explained below.
Asset-based approaches
This business valuation method sums up all the investments in the business. It is widely used when it comes to liquidating a business. There are two distinct ways of calculating the value under an asset-based approach. Either, you list the business net balance sheet value of the business's assets and subtract the value of it's liabilities or you determine the net cash that would be received if all assets were sold and liabilities were paid off.
Market value approaches
Market value approaches to business valuation attempt to establish the value of your business by comparing it to similar businesses that have recently been sold. Obviously, this method is only going to work well if there are a sufficient number of similar businesses to compare.
Discounted Cash Flow (DCF) approaches
The DCF approach, a widely accepted valuation method, is based on the idea that a business's true value lies in its ability to produce wealth in the future. It measures the value of a company by estimating the expected future cash flows. It then “discounts” those future cash flows by the buyer’s required rate of return in order to determine their present value. DCF allows the evaluator to take into account any short to medium term expectations and input various valuations directly into the cash flow or the rate of return. DCF quantities most of the subjectivity involved in evaluation.
Although the Discounted Cash Flow approach is the most popular business valuation method, for most businesses, we believe that a combination of business valuation methods will be the fairest way to determine a selling price.
Do not undervalue your business and keep in mind that professional consultation is offered at DBA Business Advisors where the best experts will assist you at every stage of your start-up valuation process!
Written by Vikrant Pangam, Specialist for Mergers and Acquisitions at DBA Business Advisors .
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