A business valuation or company reevaluation is the process of estimating the economic value of a stakeholders interest in business using a set procedure of evaluation. There might be several reasons why you may consider to get an estimated valuation of your business. Some of the most commons reasons include: Selling business due to family issues, retirement or personal reasons; the need for debt or equity financing; adding new shareholders, etc. It is essential to consider the fact that the estimated value will depend mainly on the reason for which you are getting an evaluation done. Apart from these reasons, there are certainly other factors that help to find out the value of your business. In general, valuation is a process of finding out the worth of your business if you were to sell it off. It is always advisable to get your business valued by a professional instead of doing it yourself. You can seek professional help from experts in company valuation in India.
To settle on the perfect valuation price, a business evaluator or an accountant will use the three fundamental business valuation methods to set a fair price for your business, these include:
1.Asset-based approach: This is the most straightforward approach of all, which is a total of all the assets of the company minus the value of total liabilities of your business. There are two methods to approach this method:
a.Going Concern: This approach is suitable for the business that does not plan to dissolve itself or sell off its assets immediately. The formula for this method is finding out the total equity or the full value of its assets minus the value of its liabilities.
b.Liquidation: This method is suitable for companies that are going to liquidate itself. The total amount is found out by determining what would be left if the assets of the business would be sold and all the liabilities paid off.
2.Income-based approach: The income-based approach rests on the principle that the current value of the business is an operation of the future value that an investor is likely to receive upon purchasing the business.
The two methods under this approach are:
a.Discounted Cash Flow method: This method values a business based on cash flow projected by it after discounting to its present value.
b.Capitalization of earning method: This method helps in determining the company’s cash flow using the past records of earning and then normalizes them for any unusual revenue or expenses after which it multiplies the expected normalized cash flow by a capitalization reason.
3.Market-based Approach: This is one of the best and most adopted approaches to business valuation in India. This approach simply attempts to set up the value of your business by comparing it with other similar businesses that have recently been sold. It is a method of comparison with the same type of business with similar assets and similar size. Needless to say, this method works only when several similar businesses are sold in the market.
While the Income-based approach is generally popular with some companies, most other companies also combine these business valuation methods to attain the best selling price for their businesses.