Business valuation is a set of processes and steps that help to assess and arrive at the worth of a business. In other words, valuing a company refers to the processes adopted to set an objective and fair price for a company in a financial market.
Company valuations are undertaken under different contexts. There are many situations that may drive a business owner or management to step back and assess what the firm may be worth. For instance, if you are a business owner, you may do a valuation if:
Fundamentally, there are three different methods that are used to arrive at a value for a business.
This approach is used when a company's valuation is based on the value of the assets owned by the firm. There are two ways to do this. A going-concern asset valuation method makes a list of the net value of company assets and deducts the liabilities from the same. Another approach is the liquidation asset-based approach where a value is arrived at, by determining the net cash receivable if the company's assets were to be sold and liabilities paid off.
In some cases, a company valuation is done by arriving at the future wealth that a company is expected to generate in a projection period. This method also factors in the potential risks of non-performance that may deter the company from earning the projected income levels.
As the name suggests, this model derives your company's worth based on the market trends. This means that your company's value will be based on how businesses that were recently sold were evaluated. In other words, the method takes the 'going rate' of similar businesses that sold, to arrive at your own price. In a market where you may not have many peers or sales to match, this will not be a popular valuation method.