Business Valuations
Candlefocus EditorBusiness valuation involves analyzing financial and operating information to determine an accurate value of the business. Professional valuation experts use various methods to evaluate businesses and arrive at an opinion of value. Two common methods of business valuation include the market capitalization method and the earnings multipliers method.
The Market Capitalization method is calculated by multiplying the company's current market share price by the total number of shares outstanding. This method may indicate that the market believes the company's current assets and operations are worth certain amount per share and may also give an indication of the company's potential growth.
The Earnings Multipliers Method is based on examining the historical earnings performance of the business, usually over the past 3 years. This method assumes that the business is expected to continue to generate similar levels of returns and that some multiple of current earnings can be used to arrive at a value. Typically, an industry-standard multiple is used to calculate the value of a business.
Business valuations involve assessing numerous collection of quantitative and qualitative information and requires analysis and judgement to come up with a fair value of a company. Valuations are critical for understanding the true potential of a company whether it be for sale, acquisition purposes or for estate taxes. No matter what the reasons for needing a business valuation, the opinion of value will always be based on the data and research available to ascribe a value that is reasonable in the current market conditions. This is why it is important to use a professional who is knowledgeable in being able to use information to determine the proper value.