In any kind of activity, certain external or internal elements affect every process, there are various factors which actually determine the content, construction, and result of a business valuation. This article summarises those elements that shape up a business valuation report.
The first step to the final step
When you start the preliminary work of evaluating a business or company, the economic conditions, including income, debts and the atmosphere of the company have their say in the analysis. For every valuation report, there will be an objective, like the company is on the verge of selling or getting acquired, or planning for a change in the management or partnership etc and a target audience for whom the valuation is to be done. These, along with the purpose of making the appraisal report influence the entire construction of the analysis.
The internal conditions of the company such as manufacturing methods, labor, and work-force, management structure, statistical publications from legislative bodies and external economic factors from local, regional and larger conditions find their way into the report.
Regular update of financial statement forms the backbone for the running of any business and business valuation studies the statements using methods like ratio analysis, common size analysis, trend analysis over time and subject, and industry comparative analysis. The business in itself is analyzed as well as with other industries of the similar genre from the date of valuation.
The parameters covered include cash flow, balance statements, liquidity, discounts, turnover, etc. The company’s growth prospects can be represented in terms of revenues, expenditure, profitability, market capitalization, risk management and capital budgeting while building the valuation report. The number of shares and the stock price are also considered for the current period as well as in trend analysis, to finally form the earnings multiple.
Three primary approaches are used for determining the value of a business depending on the objective of the appraisal report, time period and the target audience. Based on the requirement, a person carrying out the business valuation constructs an analysis mode using one or more of these approaches.
- Income approach: This approach follows the discounted cash flow or the net present value of the income generated by the business.
- Market approach: The value of the business is represented by comparing it with similar industries working on the same level and region in the common market in this comparison approach.
- Asset-based approach: The value of the business is considered from its various parts or assets to get a net asset value.