Business Valuation and Restructuring

It is to the utmost importance that a business owner or company must understand the true value of their business. This helps in selling or buying a business, doing settlement on litigation, initiating capital restructuring and for expansion of the business.
A qualified valuation professional is required to perform high-level financial analysis.
There are a lot of important benefits from a comprehensive valuation analysis performed by an expert. Businesses that are trying to reduce their spent are missing out on all these benefits.
In order to negotiate a fair price for selling their business and minimizing the financial risk of the management in litigation, these benefits play a major role.

Assets, liabilities, income, management, and location are responsible for driving value to a business.

Business valuation is a process of determining the current valuation of the company.Various techniques are used in this process to determine true value.
Fair market value is the Typical standard of value that is utilized. Fair market value is an approximation of the market worth of a business, based on what an informed, prepared, and a discretionary buyer would probably pay to an informed, prepared, and discretionary seller in the market. An estimate of fair market value may be founded either by taking into account earlier events or by determining future projections. Before placing a value on a company, various factors are looked at such as the company’s management, its capital structure, future earning prospects and market value of its assets.

Following are the ways to value a Company or Business

  • Intrinsic Valuation
    It points to the value of a commodity to its inherent characteristic. The capacity to generate and risk in the cash flow is examined. In easy words, Intrinsic valuation is determined by calculating discounted cash flow. The present value of an asset is a direct result of future cash flows where businesses have predictable cash flows.
  • Relative Valuation
    Pricing of comparable assets are analyzed in association of common variables like earnings, book value, sales or cash flows
  • Contingent Claim Valuation
    Assets that share option characteristics are measured by determining their value using option pricing models.

Asset Method

All the underlying business assets are taken into consideration to derive an estimation of the value of the overall business enterprise.

The economic principle of substitution needs to be taken into account for the asset method. This method also considers the costs that could be incurred for creating a business of equal economical usability as the business in consideration.

Assets in sole proprietorship belong to the sole owner and separating the assets for business and personal use is challenging. This method can be applied to a corporation as it will also assist in a company sale.

Business Valuation Methods are as follows:

  • Book Value Method
  • Liquidation Method
  • Replacement Value Method

Market Method

Similar Businesses that are recently sold are compared to the value of one’s business. When there are an appropriate number of competitors, only then this approach can be used. Market method uses the economic principle of competition which takes into consideration similar businesses whose value has been recently established to determine the business value.

 

Business Valuation Methods are as follows:

  • Comparative Company Market Multiple Method
  • Comparable Transactions Multiple Method
  • Market Value Methods

Essential Documents Required:

  • Registration and license documents Last 2-5 years
  • Business plans/budget for next 3-7 years
  • Loan documents for key loans
  • Details of major contracts
  • Lease documents
  • Tax returns
  • Inventory reports

Income Method

According to the Income Method, the ability to generate wealth in the future depicts the true value of the business. Single value income or stream of income that the business owners might receive in the future is used to estimate the returns. Future cash flows are determined by analyzing past records and predicting future financial risk. Capitalization or Discount Rates are used to quantify the risks.

Business Valuation Methods are as follows:

  • Price to Earnings
  • Discounted Cash Flow Method

Do you want to manage your business efficiently and effectively?