We often calculate our net worth by subtracting our debts and loans from our assets. However, as entrepreneurs, we ponder, “What is the true value of business?” Every entrepreneur knows the value of the fixed assets owned by their business, but is that the only value a company has?

In simple terms, business valuation is the process of ascertaining a company’s” economic worth” based on its business model and external environment. Calculating a business’s value takes work as it involves the inclusion and computation of a large quantity of data. Here, we would like to share our views on the following questions

• What is essential to know the actual value of your business?  
• Factors considered in valuing a business?  
• How do you value your business?

Importance of knowing the actual value of your business

Entrepreneur’s perspective

• Entrepreneurs should periodically analyze their business’s worth. This information is helpful in various scenarios, such as changes in ownership, the need for external financing for restructuring or expansion, merger opportunities, exit strategies, shareholders leaving, or new partners joining and needing to know their share of investment.
• In this competitive world, businesses can only sustain themselves through growth. Growth requires identifying favorable industry factors and finding potential investors with which to partner. To attract investors, it is essential to evaluate the value of business realistically. Therefore, a valuation report is a requisite tool for attracting potential investors.

Investor’s perspective  

• A valuation helps the potential buyer or investor understand the value of an investment opportunity and forecast the approximate rate of return on investment.  
• Investors have a chance to understand the business plan in detail and challenge/negotiate potential risk factors that impact the business.

Factors considered in valuing a business

Although the factors that ascertain the actual value of business vary from case to case, the following are a few of the essential factors to be considered for starting a business in India:

• Nature of business, its history, prognosis, and growth capability  
• Promoter and management strength  
• Uniqueness/innovation element of the product/service, if any  
• Competitive landscape  
• Customer loyalty and relationship with suppliers  
• Historical financials and future predictions  
• Economic outlook in general (including industry growth potential

How to value your business?

Listed below are the generally acceptable methodologies of valuation:

1. Asset approach

This method is usually used to value companies that have grown to their peak stage or those in a downward growth phase and real estate and investment companies with a considerable asset base.

• Book value method: It is based on the value of assets and liabilities, as shown on the balance sheet.  
• Replacement cost method: The current cost of setting up a plant or buying an asset of similar size and capacity is considered and applied to arrive at the value.  
• Liquidation value method: The value that the various assets would fetch if sold is estimated to determine the total value.

2. Income approach

This is based on the assumption that a business’s present value is a function of its expected future earnings.

• Discounted Cash Flow method: The future free cash flow is discounted to arrive at a present value estimate.  
• Capitalization of earnings method: A capitalization rate relates to future and current earnings.

3. Market approach or Relative Valuation method 

The company/assets/transactions are compared with its peers. However, selecting comparables is a critical task as this is subjective, and various factors must be considered.

• Comparable company multiples method: The market multiples of equivalent companies are calculated and applied to determine the business value.

• Comparable transaction multiples method: It considers transactions that happened in the immediate past or are currently happening in a similar industry. It is commonly used in the case of M&A.  

• Market value method: This method is Suitable for listed companies that have frequent nationwide trading of their shares, where the implicit potential of the company is reflected in the market value.

Knowing your business’s value is very important, especially when considering a business for sale in India. It helps you make smart decisions, whether you want to sell, merge, or plan for the future. A proper valuation shows you what your business is worth, points out strengths, and reveals areas that need improvement. Regularly checking the value of business can prepare you for any opportunities or challenges. Understanding your true value of business gives you the confidence to make the best choices for your future.

For further details, Contact us at www.matchvalley.com for a free consultation regarding your business valuation. You can also reach us via email at [email protected] or call us at +9195381 11008.