Business Valuation Methods for Your Company Valuation
Business valuation is an important part of most businesses because knowing the fair value of a company is useful for a lot of business tasks. For instance, investors and other stakeholders of the company often make important decisions based on the company’s value.
However, since there are various business valuation methods and practices that can be adopted by a company, it can be difficult for inexperienced individuals to determine the best way of business valuation.
As such, it is recommended that businesses choose to engage an outsourced accounting service in Singapore.
Let’s discuss the various aspects of business valuation in detail.
What is Business Valuation?
Business valuation, also called company valuation, is the process of evaluating the total financial value of a business and its assets.
All different aspects of a business have to be evaluated during business valuation procedures to determine the overall worth of the organization.
The exact reason for business valuation can greatly vary, such as to determine the sale value or fulfill tax obligations.
Top 5 Business Valuation Methods
1. Book Value
One of the most common ways of determining the value of a business is through the calculation of its book value using data obtained from the balance sheet. This is a very simple method, but it cannot be fully relied on for the business valuation of large companies.
It essentially involves subtracting the company’s liabilities from its assets to calculate the owners’ equity. If the company has any intangible assets, they are also excluded. The remaining account represents the value of the company in terms of tangible assets.
2. Discounted Cash Flows
Using discounted cash flows to value a business is considered to be the gold standard of business valuation.
As the name suggests, discounted cash flow analysis deals with the estimation of company value on the basis of its current cash flow and the amount it is expected to generate in the future. The current value is determined according to the discount rate and time period of analysis.
It is a popular method of business valuation mainly because it also reflects the company’s ability to create liquid assets.
However, a huge disadvantage of discounted cash flow analysis is that the valuation can greatly vary on the basis of the assumptions made about the business’s future growth and discount rates.
Unprecedented conditions, such as the COVID-19 pandemic that disrupts global markets, can cause the business valuation obtained via discounted cash flow to be highly inaccurate.
3. Market Capitalization
Another simple and easy way of valuing a business is through market capitalization. It is obtained by multiplying the share price by the total number of shares.
However, a significant drawback of market capitalization is that it only deals with the value of equity, while many organizations work with a combination of debt and equity.
4. Asset-based Valuation
Asset-based valuation is used by professional accounting firms in Singapore. This method of business valuation involves calculating the total net asset value of the company and subtracting the value of its liabilities from it.
There are also other types of asset-based valuations. If you choose to outsource accounting services in Singapore, you won’t have to worry about such classifications as the experts will select the best way to calculate your business value.
Generally, businesses that expect to keep operating for a long period have to use the going-concern valuation method.
However, if a company is expecting to shut down or it is operating with the assumption of business being financially unfeasible in the future, it has to use the liquidation asset-based valuation method.
Keep in mind that by using the liquidation-based valuation method, the total value of the company’s assets will be lowered to a great extent.
5. ROI-based Valuation
Another popular method of business valuation is the ROI-based method. Accounting firms in Singapore calculate the value of the business on the basis of the profits and type of return on investment in this method.
It is a highly beneficial business valuation method, especially for investors. They get complete information about the expected ROI of the company. Nevertheless, due to massive fluctuations in ROI, it is critical that market conditions are thoroughly evaluated to make correct assumptions.
All in all
Other than these top five methods of business valuation, an accounting firm in Singapore can take other approaches to evaluate a company’s worth, depending on its sale and the industry in which it is operating.
By relying on the experts, businesses can ensure that the best business valuation methods are implemented to obtain an accurate worth.