Question

Briefly explain business valuation and its purpose (also referred to as company valuation). Select a valuation method from the introduction in the Learning Guide and describe why you might use that method to value a business.

Answer 1

Ans.

Business or company valuation is the process of determining total valuation or worth of the company at any given time .

It is a process in which professional valuer are appointed to determine the value of the company which could be guiding principal un case of determining share of partner in case of partnership business ,sale value of company in case of there is a proposal of selling whole or part of business and in some cases in order to determine the tax liability of the business .

A business valuation may also be done when a business entity is looking at merger or acquisition of another company .A business valuation when done through professional includes an analysis of present and future earning of the company ,valuation of its assets both fixed and liquid assets and the management of the company as well.

Different models of business valuation.

1. Market capitalization method. If a busines or company is registered than it is the easiest way to determine value of the company as share price of the company is almost perfect reflection of its valuation. In this method we determine valuation of company by multiplying share price of the company with the total number of shares outstanding. But this method cannkt be used in case of unlisted business entity.

2. Comparable analysis . Comparable analysis or peer group comparison analysis is the method in which a comparison of business is done with similar company in same business by applying multiple of EBITDA or other multiples This method provide and observational analysis on the basis of which a particular business can be valued.

3. Precedent method . In this method valuation of business is derived upon the basis of valuation of business which may have been recently sold , suitable adjustment are made for premium valuation of specific business.

The most scientific method which can be used for analysing business or company valuation is DCF analysis

DCF ANALYSIS._ Discounted cash flow analysis or DCF analysis is a technique where a professional make a forecast of business unlevered free cash flow of business into the future and discount it back to today at the firms Weighted average cost of capital .

This analysis gives result in most accurate valuation of business as it is most detailed formula and valuation is determined by building a financial model in Excel and application of detail analysis A DCF model allows the expert to forecast on the basis of different valuation

This method also takes into account impact of inflation on the valuation of bussiness.

There are some other methods of business valuation as well.

A.Book value._ This value is detrrdeter by subtracting total liabilities of the company from total assets of the company.

B.Liquidation value .the liquidation value is net cash flow which business would receive if all assets are liquidated and liabilities are paid of .

In the end it can be said that there is no exhaustive list of business valuations method there are many more technique fir valuation business of different nature and new business valuation method keeps on coming in .