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What is the Value of My Business? Methods on Calculating Your Business’ Value

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Knowing the value of your business is imperative when looking to make future decisions for your company. Whether you are planning on selling or just want to know your position against competitors, business valuation analysis is a necessary step. These four different types of valuation methods can help you take the first step to making informed business decisions. This article provides a broad overview of the different types of business valuation methods. This broad overview will help you determine which method is right for your business. Our future articles will go into each of these methods in more detail with examples on how to determine the value of your business. 

Precedent Transactions Analysis

This type of valuation method is done by looking at other comparable companies that have been recently sold or acquired. The first step in Precedent Transactions Analysis is to find a list of comparable companies. Websites like Bloomberg, offer databases for a subscription fee that provide information about recent mergers and acquisitions. Once a list of comparable companies is found, it is useful to do research on the situation surrounding the transaction. For example, the market conditions during the time of the sale as this can affect the purchase price. If available, it is important to uncover the key deal terms and financial information of the comparable companies. This information is more difficult to find in situations involving private companies, however, it is helpful when valuing your company. After the relevant information is discovered, the next step is to compare that information to your company. This analysis is helpful if your company is considering a merger or acquisition.

Comparable Companies Analysis

The comparable company analysis can provide your company with information surrounding your company’s relative position among comparable companies. This method compares the current value of a business to similar businesses. This is the most widely used approach, however, it can be difficult for private companies due to the lack of information publicly provided by private companies. Under the comparable companies analysis the first step is to find similar companies. If a relevant group of comparable companies doesn’t exist, the next option would be to make a broad list of companies that can be narrowed down to companies similar to your own. Once this list is created, it is important to reflect on your company’s information as well. For example, considering size, profitability, future financial performance, and debt. Then this information can be compared to similar companies to determine your company’s value.

Reproduction Analysis

The reproduction analysis method is also called the cost approach or asset approach. This method looks at what it would cost to rebuild the business or start a competing business in the same position. Reproduction analysis is useful for competitors seeking to buy a company. However, it is also useful for startups or companies when there is not enough comparable data available. This process can be done internally through analysis of the actual costs associated with starting your company.

Discounted Cash Flow Analysis

Unlike the other valuation methods, the discounted cash flow analysis (DCF) is an intrinsic value approach which does not use market analysis. This method requires the most analysis and detail. However, it often produces the highest value and most accurate valuation. Discounted Cash Flow Analysis determines business valuation from the present value of its projected free cash flow. The projected free cash flow (FCF) is the expected financial performance of the company. “FCF is the cash generated by a company after paying all cash operating expenses and associated taxes, as well as the funding of capex and working capital, but prior to the payment of any interest expense.” Joshua Rosenbaum & Joshua Pearl, Investment Banking 2890-91 (2013) (e-book). After calculating a company’s PCF, calculating that company’s weighted average cost of capital (WACC) and terminal value is necessary when using the discounted cash flow analysis. Once these numbers are calculated the present value and business valuation can be calculated. Although this method is accurate it relies on accurate financial projections which can be difficult for some companies. This method may not be the one for your company if it cannot provide accurate financial projections.