How to Do a Valuation of a Company

When it comes to assessing the value of a company, there are an almost infinite number of ways to form it. But the most practical and adequate in this matter is the comparative method. So how to do a valuation of a company?

Why Is a Company Valued?

Valuing a company is like playing chess. A chess player who plays white and one who plays black can evaluate the position on the board differently. Likewise, the owner and investor are likely to have different views of the same company. Obviously, this is because the owner and the investor have different goals. From the owner – to sell the company or part of it for the highest possible cost, from the investor – to buy a share or the entire company for the lowest possible amount.

With a valuation report, it’s not scary to go cheap when selling a company or investing in an unsuccessful project. A company valuation is needed for:

  • buying or selling a business or share in it;
  • mergers with other firms;
  • decisions to issue or sell securities;
  • preparation or adjustment of the business plan;
  • optimization or restructuring of the enterprise;
  • comparing the investment attractiveness of the project with other options for investing money.

To value a business, they use an income, comparative, and cost approach. In each of the approaches, there are evaluation methods that differ in the way information is collected and analyzed. The choice of method depends on the objectives of business valuation and the state of the company.

In this method of assessing goodwill, the organization being assessed is compared with similar companies. Similar companies should be similar in terms of economic, material, technical and other conditions. After the selection of analog companies, the corresponding multipliers are calculated for them, that is, the ratio of the sale price to the economic index. The value of a company using the comparative valuation method is calculated by multiplying the obtained multipliers by the key financial indicators of the organization being valued.

What Is a Cash Flow Business Valuation?

To attract investments, you need to understand what share of the company you are willing to give for a particular amount of money. This step is possible only if you calculate the cost of your business with a cash flow business valuation. You can draw a parallel: when you are going to sell an apartment or other property, you will offer the buyer a certain price. It will not be a figure from the ceiling. You will take into account the market price of a similar property, the original purchase amount, any money spent on repairs, furniture, and other improvements.

In the process of cash flow business valuation, the value of all its assets are taken into account: real estate, property, equipment, and vehicles, investments, intangible assets. Performance, real and potential income, the competitiveness of the company is also evaluated. Finally, it is compared with others of the same kind. So the owner finds out the real value of his business.

A cash flow business valuation is a document that is necessary for investors (banks, owners, government agencies, etc.) or managers to decide on the start of investment and the implementation of the projects under consideration. It should disclose all aspects of the project that are significant to the stakeholders. The structure of the document will depend on the situation, but usually, the work includes the following: financial analysis, studying the current situation of the company.