Business Valuation Methods – Expert Guide

Business valuation is the process of calculating the economic value of the company. It is also known as company valuation. An analysis is conducted for the whole company’s and its departments’ worth. Several business valuation methods can be used to find the business’s fair value.

A business valuation can be done for various reasons, such as to help in sales or merger agreements, taxation purposes, etc. Companies usually turn to professionals to bring an objective view of business valuation.

7 Business Valuation Methods

Several methods can be used to evaluate a company’s valuation. The method selection for the analysis depends on factors like the reason for valuation, available information, industry, and market precedence.

These are the seven methods that you can use for evaluating a business.

Discounted Cash Flow Analysis

This analysis calculates the company’s future cash flow based on current performance. This cash flow is adjusted for inflation to obtain the company’s fair value.

Market Capitalization

It is calculated by multiplying the share price of the company’s stock by the number of outstanding shares. This method is the simplest way of calculating a company’s value.

Let’s take Apple, for example; their current share price was $189.97 at the time of writing. Their outstanding shares for 2023 were 15,599. So, according to the market capitalization method, their value would be $189.97 x $15.599B = $2.963 Trillion.

Times Revenue Method

In this method, a company’s revenue is applied with a multiplier. A certain period of revenue is used for this analysis, and the multiplier is based on the industry in which the company operates. A company operating in the agriculture industry will have a different multiplier than one operating in the tech industry.

A business that has done 1 million in sales operating in an industry with a multiplier of 3 will have a valuation of $ 3 million. Whereas a company operating in an industry with a multiplier of 1 and revenue of $500,000, its value will be $500,000.

Earnings Multiplier

The earnings multiplier method values a business based on its current earnings and a multiplier. Unlike the times revenue method, this business valuation method considers the profits rather than the sales revenue. For this multiplier, the company’s future profits are adjusted against cash flow that can be invested at the current interest rate over the same period.

This method is often used in shark tank to evaluate a company’s value. The company’s profit and revenue are analyzed to create a multiplier. This multiplier is applied to the company’s profits to create a valuation.

Book Value

Book value is the shareholder’s equity value of a company on the balance sheet. This value can be easily calculated by subtracting a company’s total liabilities from its assets. This business valuation method is often used for sale agreements.

Liquidation Method

Liquidation is the process of selling off all the company assets. The liquidation method is a company’s net cash value after liquidating all its assets and paying off its liabilities. This method does not consider intangible assets like trademarks, patents, user acquisitions, and brand awareness.

Market Based Valuation

This valuation is based on the current market precedents, both public and private. Transactions happening in the industry are analyzed to estimate the company’s value. This method is suitable for putting up a business for sale or partner buyouts.

These are the seven ways you can perform a business valuation. Remember, this is not an exhaustive list. Various other methods are used today, like EBITDA, Real options valuation, etc.

Companies look for accredited experts to perform an objective business valuation for them. We are experienced professionals who have worked on countless valuations. You can contact us if you have any queries about business valuation methods.