A business or company is made up of multiple units. To know the value of a business, it is very important to know the value of every section to determine its economic value. The business valuation can be done to know the fair value of the business for various reasons such as knowing the taxation, partnership value or even just to understand the worth of your business.
Business valuation is a term used in the corporate finance world. Business valuation is conducted when a company decides to sell a part of the whole of the business. Business valuation can also be done before a merger or an acquisition. During the process of valuation, the effective value of all the operations is determined.
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What is the significance of business valuation for a business owner? They will know the exact value of the assets they have invested in the business.
Business valuation should never be done by the owner of the business themselves. They should always hire a consulting firm to do this job. When business valuators access the value of the business, they use three methods.
- Asset valuation method
The asset valuation method is the most common method which is known by most of the accountants. In this method, the value of a business is determined by assets minus the liabilities. The value of the assets can be determined further by using methods such as carrying value or fair values.
The biggest advantage of this valuation method is the ease of the calculations. There are no complex calculations and can be done easily. However, the exercise of determining the value of assets can be a lengthy and costly process. This valuation method is best for companies with no or little operational cost and more capital-intensive industries.
- The income approaches
The income approach follows the discounted cash flow method, where you calculate the present value of an asset using a future discounted rate. This approach is best for business with a stable form of revenue and constant earnings. The biggest drawback of using this valuation method is the estimation of the discount factor.
A business valuation template makes it easy for a non-financial business owner to calculate the value of their business. Business valuation can even access the profitability of any new projects. Business valuation not just helps in accessing the value of a business, it can also help business owners to get further funding for their business. Most of the venture capitalists will require to see the financials of the company. Presenting any financials along with the valuation will make it easy for the investor to base his decision on.
The business valuation template includes a detailed analysis of the net present value, internal rate of return, return on investment with a detailed breakdown of the components and chart visualization. The calculations presented are for at least 5 years with a breakup of year by year analysis. Templates ensure the accuracy of the formulas due to the excel formats leaving minimum chances for error.