Need to Value business stems from may reasons namely
- Seeking funds as Investment
- Lawsuits and Settling Litigation
- Inheritance of Property
- Certification for travel, education or specific purpose
Being a relative complex matter, often the common sense and basic key aspects help decide the variants for estimation
The 3 Widely accepted methods are as below
|Market Based||Asset Based||Income Based|
|Value of similar business in competition||Current Worth of the Assets belonging to the Co.||Future Potential of Income @ Business|
|May or may not be on Projections||No Forecast Required||Forecast is Must|
With this method you:
- identify a similar firm (within same or similar industry, same business and markets)
2. identify the valuation multiple for the business.
3. Identify the appropriate variable and valuate.
Some of the most popular multiples are:
- A) Price Earnings Multiple is calculated as Share price / Earnings per share (EPS)
EPS is net income/weighted average no of shares in issue
EPS may be adjusted to eliminate exceptional items (core EPS) and/or outstanding dilutive elements (fully diluted EPS)
Some of the key advantages are
- Most commonly used equity multiple
- Data availability is high
However, some of the cons are as
- PS can be due to varying accounting policies and manipulation
- Unless adjusted, one-off exceptional items does not give comparable valuation
- Does not work, if earnings are negative
- Price to Sales ( p/s) is less complex , more linear and often does not require change due to capital restructuring
- Price to Book ( P/B) takes into consideration the book value of the company and here income is often directly proportional to Assets
- EV/EBITDA: EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortisation is widely regarded by analysts as more reliable
It eliminates variation in capital structure, taxes , other income . Enterprise Value is the sum of Debt, Equity & cash balance & Ebidts is Earnings before Interest
Asset based approach
The Net Asset Value (NAV) is the easiest to understand. It is calculated simply as fair value of the assets of the business less the exterior liabilities owed. The key is deciding fair value, especially of assets since fair value may change significantly from acquisition value (for non-depreciating assets) and recorded value (for downgrading assets).
Also, the true value of your business may be significantly more than the simple addition of Possessions.. Things which you never taken care of may form part of the value, as would an unique way of doing business that gives your enterprise an benefit. An extension of NAV Method – the Replacement Cost Method – takes treatment of many of these issues. Set simply, it is the value any objective person would pay to arranged up a business that is precisely the same.
Income based approach
This method generally involves calculating the significance of the company using Cheaper Cashflow (DCF). In brief and very simply, this means calculating the present value of the future cash flows of the company. The discounting to provide value is done using the cost of capital of the company. Depending on goal, cash flows to the firm (that is, before debt obligations) or cash flows to shareholders may be used. It will create an Enterprise Value (value of financial debt + value of equity) and these Equity Worth.
With limited information, some of the key drivers are
- Data Availability
- Appropriateness of the method to the situation, industry, and the business
- Desired Level of Details as per Requirement
Valuation under multiple methods is average of final valuations to get more accurate figues
Principles of invariably, intuition, common sense, and acceptability will trump complexity, high math, and copious data for getting the TRUE NETWORTH.