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.
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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.
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