Valuations of Business

Overview


Business Valuation refers to the technique used to determine economic value of an organization or business. Sometimes owners turn to professional business valuators for an objective estimate of the business value. It is a process where you examine economic factors of a business using predetermined formulas in order to assess the owner’s interest in a company.

It is commonly said that business valuation is more art than science. If this is true, then the practice of valuing a startup business is squarely in the domain of the artist.

Nevertheless, entrepreneurs need to put a value on their startups in order to raise money, and investors need to put a value on their investments to generate liquidity. Since neither entrepreneurs nor investors are known for right-brain artistic thinking, this article aims to provide some tips for left-brain thinkers to make sense of startup valuation.

It is extremely hard to determine the accurate value of a company while it is in its infancy stages as its success or failure remains uncertain. There is a saying that startup valuation is more of an art than a science. There is a lot of truth to that. Moreover, for any start-up, documentation has its own importance.

If you are trying to raise capital for your start-up company, or you are thinking of putting money into one, it is important to determine the company’s worth. However, for documentation purposes, Starters’ CFO is a one-stop solution for you.

Valuation is not exactly a science or an art. Fair Valuation is the process of determining the “Economic Worth” of an Asset or Company under certain “Assumptions” and “Limiting Conditions” and subject to the “Data” on the “Valuation Date”.

Approaches for Valuations

  • Cost to Duplicate: - As the name implies, this approach involves calculating how much it would cost to build another company just like it from scratch. The idea is that a smart investor would not pay more than it would cost to duplicate.
  • Market Multiple: - Venture Capital investors like this approach, as it gives them a pretty good indication of what the market is willing to pay for a company. Basically, the market multiple approach values the company against recent acquisitions of similar companies in the market.
  • Discounted Cash Flow: -For most startups – especially those that have yet to start generating earnings – the bulk of the value rests on future potential. Discounted cash flow analysis then represents an important valuation approach. DCF involves forecasting how much cash flow the company will produce in the future, and then, using an expected rate of investment return, calculating how much that cash flow is worth.
  • Valuation by Development Stage: - Finally, there is the development stage valuation approach, often used by angel investors and venture capital firms to quickly come up with a rough-and-ready range of company value. Such “rule of thumb” values are typically set by the investors, depending on the venture’s stage of commercial development. The further the company has progressed along the development pathway, the lower the company’s risk and the higher its value.


Process


Data Preparation

  • Initial discussions with management
  • Review of the past due diligence and valuation reports
  • Industry Understanding
  • Data gathering on trends on revenues and profitability

Assumption Development

  • Agree valuation priciples
  • Interviews with management representatives
  • Analysis converting all data prepared onto a single GAAP

Computations

  • Valuation analysis including cost of capital, working capital, royalty rate selection and tax implifications
  • Once data, assumptionsand model is ready, we can perform the actual calculation.
  • We typically need to perform calculations on multiple scenarios.

Report

  • We will prepare a written report to summarize our methodology and valuation results.
  • The report will be subject to our rioutine quality reviews.
  • We will make ourselves available to explain the report to you.


Documents


• AOA & MOA

• Last Audited Financial Statements

• Projected Financial Statements

• Company Profile

• Transaction Details



What we do?


• Business Valuation

• Financial Instruments

• Purchase Price Allocation

• Fairness of Option

• ESOP Valuation

• Intangible Asset Valuation

• Brand Valuation

• Intangible and Goodwill Impairment

• Fairness Opinions

• Merger & Amalgamation Swap Ratio

• Valuation of Financial Assets & Financial Liabilities



FAQs :


1. What is business valuation?

Business valuation is a process and a set of procedures used to estimate the economic value of an owner's interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to effect a sale of a business.

2. How do you estimate the value of a company?

a. Decide if market capitalization is the best valuation option.

b. Determine the company's current share price.

c. Find the number of shares outstanding.

d. Multiply shares outstanding number by the current stock price to determine the market capitalization.

3. What are the methods of valuation?

a. Discounted cash flow (DCF) analysis.

b. Comparable transactions method.

c. Multiples method.

4. How do you calculate the valuation of a company?

Analyse the company's earnings. Earnings are the company's revenue minus its costs, it is the amount that a company clears during a reporting period.Valuation is based on what this amount is worth to the buyer.Calculate the business' net present value.

 

5. How is net worth of a company calculated?

To find the net worth subtract the liabilities from the assets, from the balance sheet of the company.

6. What are the approaches of company valuation?

a. Income Approach.

b. Market approach

c. Cost approach

d. True value

7. What is valuation model?

A relative valuation model is a business valuation method that compares a company's value to that of its competitors or industry peers to assess the firm's financial worth.

8. What is the valuation ratio?

Valuation ratios put the insight into the context of a company's share price, where they serve as useful tools for evaluating investment potential.

9. How is valuation ratio calculated?

The price-to-sales ratio (P/S) shows how much the market values every dollar of the company's sales. To calculate it, take the company's market capitalization and divide it by the company's total sales over the past 12 months. A company's market cap is the number of shares issued multiplied by the share price.

10. How do you calculate the goodwill of a business?

Goodwill equals the price paid for the acquired company minus the fair market value of its net identifiable assets. To figure net identifiable assets, subtract the liabilities on the acquired company's balance sheet from the fair value of its identifiable assets.