Setting up your own enterprise is no child’s play. From the planning stage to the final delivery of the first product there are so many steps and processes to adopt. But planning a business without knowing the basics is an uncalculated risk that can cost adversely. From mastering the taxation and legal basics to marketing strategies, one needs to have a rough idea about what they are about to step into. But the one thing most of the business owners, especially first-timers, overlook is understanding business valuation.
Let us discuss about what it is and the various valuation methods whose knowledge can come quite handy in the longer run.
What is Business Valuation?
The standard definition of business valuation is to ascertain the value of the business or the company. Valuation of the company is essential to determine its sale value, an idea to quote to the investors and to establish partner relations. Furthermore, it is a vision about the value of business today and the aim for tomorrow. Another crucial factor to determine while valuating the business is “Owner benefits”. It is a term used to describe the sum that the business owner can actually extract from the complete asset.
How to calculate the Valuation of a company?
There are several valuation methods with which one can determine the actual value of their business. While all these are individual tools to prepare the estimate, a combination of techniques from all of them would help you create the optimal valuation for the company. Let us discuss about the methods in brief.
- Asset Valuation:
This is the simple and the most straightforward method of them i.e, penning down every single asset that the company holds. Then they determine their individual values and summing it up to calculate the worth of the entire business. The assets can be majorly classified into physical assets (office and its physical components), human assets (employees, partnerships, etc) and intellectual assets (trademarks, patents, copyright materials etc). With the help of business and legal experts you will not miss any fine lines and miniscule aspects of the business.
- Income Valuation
The income valuation parameter is calculated depending upon the ability of the business to generate the desired revenue for the business owner. Here, the value of the business is measured in terms of the economic benefit it offers. Data from the past are also analyzed to predict the income of the company and hence the valuation gets more challenging for the newer companies. The commonly used methods to estimate income valuation are:
- Discounted cash flow method
- Capitalization of earnings method
- Multiple of discretionary earnings method
- Market Valuation
Market evaluation is based on the company’s potential to thrive amongst its competitors in the market. This analysis is based on the demand for the company in the uncertain market trends at any given point of time. Market valuation is started by understanding the size and growth of the field in which the business operates (more growth will result in greater valuation). In the next step, the market worth of the direct competitors of the business is estimated (more competition will result in lesser valuation). The final step is to analyze the companies that had performed similar type of evaluation in the market.
For some of the business owners, especially first-timers and young entrepreneurs, these methods and process may appear to be herculean tasks. They might not have the resources, awareness or human capital to conduct such analysis to derive an accurate valuation of the company. That’s where the legal and business services companies come in to play.
MyEfilings will entrepreneurs of all age in business services for their company. From a simple name registration to tax registrations, we offer a one-stop solution to manage all the financial needs of your business. Our professional and transparent operation would ensure nothing but the best kind of services for you and your company.
Get in touch with us today to know more about what we can do for you.