It is very important to maintain flexibility of thought, not to lose Critical vision and ability to judge
The Necessity for Company Valuation
The need to have your company valued can arise for various reasons.
- Partly in connection to allocate the company’s issued stocks.
- As part of the increased trend of companies mergers, acquisitions and takeovers
- Other reasons such as tax calculations
- Or simply to provide the company founders with an indication as to the value of the activities they manage
The topic of company valuations has been popularized over recent years by the International Financial Reporting Standards (IFRS), which has also contributed to the spread of relatively new financial terms such as PPA – Purchase Price Allocation, tangible and non-tangible assets, etc.
Different Valuation Methods: Preparing a Company Valuation
There are several methods currently being used to appraise company value. Some are more intuitive than others and based on presumptions usually drawn from financial reports and industry overviews. Other techniques are more sophisticated and rely on financial forecasts including Profit & Loss Statement and Cash Flow.
Choosing the correct method for your company will depend on the nature of your business, the purpose of the valuation, the developmental stage of the business and other related factors.
Different valuing methods can produce diverse results, and may lead to differing conclusions. Additionally, assessors can often disagree on the fundamental presumptions upon which they base their valuation, thus producing dramatically different figures.
In some cases several methods are used in conjunction, and the final company value is a moving average of all the results. It should be apparent that producing a fair and reasonable valuation of a company’s worth largely depends on selecting the most appropriate valuing technique.
In light of the above, it should also come as no surprise that the valuation process requires specialized knowledge of all methods, and experience of the relevant industry and market in which the company operates.
There are several possible methods to value a company; the following list comprises the most popular ones:
The DCF Valuation Method
One of the most commonly used valuation methods today, intended for companies with ongoing concerns, and utilizing various operational forecasts to arrive at a final company value.
This method works from the basic assumption that investors will seek to make the maximum profit from their investment, including cash return after ROI and calculations of any further investments necessary to ensure future profit.
The Asset Valuation Method
The asset valuation method is essentially the simplest and most intuitive way to determine a company’s worth. It is based on analyzing the company’s liabilities and assesses sections as are being reflected in its balance sheets. Subsequently, the value of a company grows in direct proportion to the increase in assets and decrease in liabilities.
This valuation method is considered to be particularly suitable for valuing companies whose ongoing concerns are at threat, and therefore the value of their assets will essentially equal the company’s actual worth. Subsequently, the worth calculated will be the “bottom” value of the company.
This method is also suitable for companies working with real-estate.
The “Multiplier” Method
This valuation technique relies on comparing financial data from a choice of companies operating within the same market or industry.
According to the “Multiplier” method, a company’s worth is determined by multiplying forecasted profits at a logically conceived rate.
This is a tentative and quick valuation method, since the Multiplier method ignores the significant discrepancies that may occur between the short term financial forecast and the company’s predicted cash flow.