As a business owner, you should know more about your business than any one.By financial terms, Valuation means how much a company is intrinsically worth of. But valuation is the best and a worth way. Thus the people with equity investments, can only have an understanding of valuation.The ultimate goal is to determine a value that can be explained and justified to others.
Value is difficult to define without comparing at least two items. Value is also subjective. For example a new design car may be worth more than a common dollar bill. Similarly, one business may have a number of values. The first and the foremost step in any valuation is to accurately and completely define the property that is being valued.Then the second step in valuation is defining for whom the property is being valued.
A business valuation is nothing but an estimate of calculating the worth of business through its hypothetical sale. It is also called as business appraisal and has some similarities with real estate appraisals. Most of the business value is in the form of intangible assets, or goodwill. Valuing intangible assets are somewhat risky and involves various valuation approaches and methods.
Generally Valuation is an important input for the negotiation process relative to the percentage of ownership that will be given, to the venture capital investor in return for the funds invested. There are 3 primary approaches to valuing a business – market, income and asset. Many valuation methodsare used, each with their own strengths and weaknesses. They are,
The value of a company can be estimated by comparing with other similar size companies. You have tp consider many factors while selecting comparable companies such as size, growth rate, risk profile, capital structure, etc. Eg: comparing a public company with a private company.
The Net Present Value Method :
The Net Present Value Method involves calculating the value of the projected cash flows expected to be generated by a business over a specified time horizon or study period .
There are two important methods used for calculating the value.They are,
Calculate Net Present Value of Annual Cash Flows
Calculate the Net Present Value of the Terminal Value
The Venture Capital Method :The venture capital method of valuation recognizes these realities and focuses on the projected value of the company at the planned exit date of the venture capitalist. Here are some of the steps used in calculating the venture capital method are,
Step 1: Estimate the Terminal Value
Step 2: Discount the Terminal Value to Present Value
Step 3: Calculate the Required Ownership Percentage
Step 4: Calculate Required Current Ownership
These methods are very useful and they provide certain starting points and supply a range of reasonable values. The value of a company is dependent on the particular time of the valuation and on the true motivation and goals of the key players involved in the transaction.
Finally each and every business owner should know about your company’s worth which is a critical piece of information. Then we can easily explore our own business valuation.
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