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Business Valuation: An Overview

What is Business Valuation?
Business valuation is the series of various methods and techniques of calculating the worth of a business run by a firm or entity. Valuation is needed for many reasons such as capital budgeting, investment analysis, financial reporting, merger, and acquisition, determining statutory liability and during the litigation process. 

Wealth comprises of assets and liabilities. Valuation of assets and liabilities are made to reflect the wealth position of a firm or entity through the balance sheet and to supply the logistic to the measure of periodical income of the firm through profit and loss account.


Business Valuation



Types of a Value

Book Value: It is the value of assets as carried on the balance sheets.

Liquidation Value: It is the estimated price that the firm would receive by selling its assets if it were going out of the business.

Going Concern Value: It is the value of the firm or an entity as an operating business.

Intrinsic Value: It is the actual value of the firm based on an underlying opinion of its true value including all aspects in terms of both tangible and intangible factors. This value may or may not be same as the current market value. It is the value at which assets should sell based on applying data inputs to a valuation theory and model.

Fair market value: It is the price that the given properties and assets would fetch in the marketplace.


Approaches to Valuations

Market approach:  If one is looking to buy a business, one decides what type of business he is interested in and then looks around to see what the going rate is for the business of this type. If one is planning to sell the business, he will check the market to see what similar businesses sell for. Market approach depends on signs from the real marketplace to determine what is the business worth.

Cost approach: Cost approach involves restating the individual assets value to reflect their fair market value. It is a useful approach for the valuation of the business when it will be liquidated and trade payables must be satisfied.

Income approach: It considers the core reason for running a business i.e. making money. Here is the so-called economic principle of expectation applies. In view of the fact that the business value must be established in the present, the anticipated income and risk must be translated to today. The income approach generally uses two ways to do this translation: Capitalization and Discounting


A number of different measurement bases are employed to different degrees and in varying combinations in the valuation of different assets in different areas of application. They include:

Historical Cost: It is the amount of cash and cash equivalents paid or the fair value of the other considerations given to acquire the assets at the time of their acquisition.

Current Cost: The amount of cash and cash equivalents that has to be paid if the same or the equivalents asset were acquired currently.

Realizable value: It is the amount of cash or cash equivalents that could be obtained at present by selling the assets in orderly disposals.

Present Values: Assets are carried at the present value of the futures net cash inflows that the item is expected to generate in the normal course of the business.


Also Read: Company Analysis for investment decision
                   Concept of Mutual Funds
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