Different Valuation Methods for Determining a Company’s Worth

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The first step of selling your business is to know its worth or valuation. Check out this post to know some of the different methods used for determining the economic value of a company.

If you are planning to sell your business, the first step is to know what your business is worth. Business valuation is the process of determining the economic value of any company. Apart from selling your business, valuation is also crucial when you are looking to apply for a loan, add shareholders, or even purchase another business.

There are many different methods used for determining the value of a company. Some of the most popular ones are as follows-

  1. Market Value Approach

In this method, the value of your company is determined by comparing it to other similar companies that have been sold recently. But as this method abundantly depends on the market data of similar companies, it can only be used when there is adequate data available for comparing.

Due to this, the valuation of sole proprietorships is generally not done with the help of this method, as it can be challenging to find comparative data on the sale of similar companies.

  1. ROI-Based Valuation

As the name suggests, the ROI-based valuation method values a business as per the profit it generates, and what returns on investment (ROI) an investor could expect by investing in the company.

This method is commonly used by business owners who want to sell their business or looking for equity financing as it enables them to better present their company to the buyers and investors.

  1. Asset-Based Valuation

The asset-based method considers the total net assets of your company after deducting the liabilities. This valuation method can be used either with the going-concern approach or liquidation value approach. If you want to continue operating your business, the going-concern approach will value your business as per its total equity.

If you want to sell your business in parts or in full, the liquidation method will consider the net cash of the company if all of its assets are sold.

  1. DCF Valuation

The DCF or Discounted Cash Flow method takes into account the projected cash flow of your company, adjusted or discounted as per its current value. Inflation is also taken into consideration for determining the present value of the company.

This method is commonly used for valuing businesses whose profits might significantly increase or fall in the future.

  1. Earnings Multiplier

Earnings multiplier is one of the most popular valuation methods among companies that have been generating consistent profits for a considerable duration. In this method, the future profits of a company are adjusted against the cash flow, which can be invested at the current interest rate throughout the duration that is considered for determining future earnings.

In simple words, the current P/E (Price-to-Earnings) ratio of the company is adjusted as per the current interest rates.

Why Should You Consider a Business Valuation Advisor?

While it is essential for business owners to understand the basics of all the popular valuation methods, when it is time to conduct a business valuation, it is best to work with a professional valuation advisor.

Valuations are complex and extensive. Only a professional advisor with extensive experience would be able to objectively examine your business and recommend the best valuation method. It is also possible that the best valuation method for your business is a combination of multiple methods.

You can look for a reputed advisory firm that excels in valuation advisory so that you can get the most accurate sense of your company’s worth.