05 / 11 / 2020

How to properly determine the value of the company?

Valuation of a company is nothing more than determining the actual value of the entire company using selected methods that use the information and financial data held. What is important, the more accurate and supported by facts evaluation will be, the better position will be obtained by the company in possible negotiations of conditions, e.g. in case of sale transaction. When estimating the value, it is necessary to take into account such factors as the type of business, legal form, scope and subject of conducted business activity. It is also necessary to know the market value of its assets, the real value of its liabilities and check how profitable it is.

The valuation of a company can be divided, from the point of view of the person conducting it, into the following stages:

  1. dentification of the purpose and object of the valuation.
  2. Selection of the fundamental assumptions of the valuation.
  3. Choice of approach to valuation and the method or methods of valuation.
  4. Data collection, analysis and adoption of valuation business assumptions.
  5. Value estimation, including the application of adjustments - discounts and bonuses.
  6. Preparing a valuation report and submitting it to the client.

 

In theory, there are many methods of valuation of companies, but not all are suitable for estimating the value of companies for every purpose. Among the most commonly used ways to estimate the value can be identified as basing on income, property, comparison. Each approach is relying on different information and needs different data to make a proper analysis. Using only one estimation method may not be reliable, so it is best to use several methods simultaneously.

An income-based approach. The basis for determining the value of a company in this approach is a forecast of future revenue flows generated from operations, discounted by the expected rate of return. In other words, the actual value of the company can be determined on the basis of the discounted value of all the cash flows the company will obtain in the future.

An approach based on the amount of assets. As the name suggests, the property approach to the valuation of companies is based mainly on their property resources. Using a given method, the value of the company is determined as the total of owned assets reduced by the amount of all liabilities. One particular disadvantage of using a given method is the use of information contained in financial statements, assuming in advance their reliability.

Comparative approach. The main action taken using a given method is to make an estimated valuation of enterprises according to comparison with other entities with similar business profile. The ground for starting the valuation is the selection of comparable companies and comparative measures.

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