Corporate valuation is the process of appraising the economic value of a whole business or parts of it. Such valuation provides important information for any business considering a buyout, merging with or acquiring another firm. The information is also crucial for businesses needing to access financing, establishing equity interest in the business, establishing and settlement of tax obligations and estate settlement in case an owner passes away.
The particular definition of the business value largely depends on the intended purpose of the valuation process and therefore, circumstances of the features of the business. There are a number of factors should be taken into consideration when determining the value of your business. Some key items include;
If you or your management team has a strong record of steering the business in a successful direction, then this this can have a positive impact on your business’ value. Good corporate governance practice helps build up a company’s integrity, leading to positive performance and a sustainable business overall.
Detailed financial statements showing historical cashflows and profit margins, as well as future cashflow and profit projections, and the current capital structure of the company can all have an impact on your business valuation.
The market value of the physical assets that you’ve acquired can also boost your business valuation. This includes assets such as your business premises, equipment including computers and tools, stock, and furniture.
Intangible assets are non-physical assets such as brand, goodwill, patent, trademarks, proprietary technology, and customer list that have a significant impact on your business valuation.
The Business Operating Environment
The general condition of the economy, the sector in which you operate, your business market share and its size, can affect your business valuation.
Each business has its own unique features and business valuation can be complex. Professionally, a business valuation may take a number of approaches, including:
- Income Approach
When applying the income approach, the projected cash flows expected to be generated by a business are discounted to their present value using the weighted average cost of capital that indicates the time value of money of the projected cashflows.
2. Market Approach
This is a general way of determining a value indication of a business using one or more methods that compares the subject to similar investments that have been sold.
3. Asset-based Approach
This approach focuses on the company’s total asset fair market value after deducting total liabilities. This approach also allows consideration of the business goodwill and other intangible assets in the valuation process.
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