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How is a Company’s True Value Determined?


Apr 14, 2021
How is a Company’s True Value Determined?


There are many ways to determine the actual economic value of a company. Check out this post to know some of the most common business valuation methods.

There can be several reasons for determining the true economic value of a company. From business sales, M&As, public offerings, partner exits, inheritance, lawsuits to equity financing, an accurate estimate of a company’s market value is needed in many situations.

Business valuation is a process through which the true value of a company is determined. There are different valuation methods that are suited to different scenarios. However, three valuation methods are commonly used. Here is a quick overview of these popular methods-

1. Asset-Based Method

In simple words, the asset-based valuation method values a company as per its total investments. It can either be done through a liquidation approach or a going concern approach. In the liquidation method, the net cash or liquidation value of all the assets is calculated after deducting all the liabilities.

In the going concern approach, the company’s total liabilities are deducted from the assets as per its balance sheet. The final value calculated through this method is also known as the book value of the company.

Market Value Method

In the market value approach, a company’s financial worth is determined by comparing it to a similar company that got sold recently. Another common example of this method is the valuation of real estate by using property comps or comparables. In this, the value of a property is determined by comparing it with a similar property.

While this valuation method is simple, it is only possible to use it when there are adequate similar companies available for comparison. Niche companies active in unusual market segments often do not have adequate competitors. So, the market value method might not be the best choice for such companies.

3. Earnings-Based Method

In this method, company valuation is determined according to its wealth-generating potential in the future. There are two approaches in this method- past earnings capitalisation and future earnings discount. Past revenue capitalisation is all about finding the company’s average earnings as per its records.

In the future earnings discount approach- the average of what a company might earn in the future is calculated after dividing the value with its capitalisation factor. In the case of larger businesses, all the different business units are individually modelled and analysed and then added together in the earnings-based valuation approach.

What is the Right Business Valuation Method for Your Company?

Every valuation method is suited for different scenarios. It is also possible to combine multiple valuation methods for determining the true value of a company. Only professional business valuation servicescan be relied upon for accurately determining the true value of a company.

Professional advisors have the experience and knowledge to implement the right strategy as per global standards for accurate business valuation. The advanced financial analysis and modelling used by valuation advisors can be trusted by businesses of all sizes across industries. A professional valuation will also accelerate the business deal, helping you get closer to your business objectives.

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