Business valuation techniques

Business valuation techniques During any business transaction – whether it is an acquisition, merger or disposal, these questions often arise. What is the fair value? What is the maximum price is to be paid? ‘Look before you leap’ acronym is to be followed when making vital business decisions and here come the need of good business valuation services.

If you are new to the term ‘business valuation’, it is better to understand what it actually is before going into its details. A business valuation is a general process of determining the economic value of whole business or company unit. It is the process that can be used to determine the fair value of a business for a variety of reasons, including sale value, taxation and establishing ownership.

It is in fact a technique carried on by the professional business valuation services in India that looks to estimate the current worth of an asset or a company. A valuation can be useful when trying to determine the fair value of a security which is determined by what a buyer is willing to pay a seller, assuming both parties enter the transaction willingly.

The leading business valuation services in India; normally follow three common approaches of valuing a company as described below: 1. Discounted cash flow (DCF): It is widely believed that DCF is the best method to understand and estimate the fair value of a company or business. The method attempts to figure out to estimate the value of an investment based on its expected future cash flows. It is an analysis that attempts to figure out the value of an investment today, based on projections of how much money it will generate in the future. The value of any company is the sum of the cash flows that is generates in the future, discounted to the present at an appropriate rate. The discount rate used is the appropriate weighted average cost of the capital that epitomizes the risk of cash flows.

2. Trading comparables: At any given point of time, the stock prices fully reflect all available information on a particular company and business. It is the most common way to value a company using comparable analysis. The professional valuation experts find a group of companies that are comparable to the target Company and work out a valuation based on what they are worth.

3. Asset based valuation: Here the service firm bases its assumption that adding value of all the assets of the company registration and subtracting the liabilities, leaving a net asset valuation and this amount can best showcase the value of a business.

4. Earning based valuation: This valuation is based on the rate of return on capital employed and it is the most modern method employed by professional business valuation services in India. Some of the valuation experts use the alternative to valuation based earning method by incorporating price- earnings (P/E) ratio in the place of the rate of return.

5. Free cash flows: This is the method used in the valuation of the business. The value is determined after taking into account the tax operating cash flow subtracting the interest paid or payable duly taking into account savings arising out of tax paid or payable on interest and after providing certain fixed commitments like redemption, preference shares dividends and redemption commitments.