Sayed Ali

A business valuation, also known as a company valuation, is the process of determining the economic value of a business. During the valuation process, all areas of a business are analyzed to determine its worth and the worth of its departments or units. A company valuation can be used to determine the fair value of a business for a variety of reasons, including sale value, establishing partner ownership, taxation, and even divorce proceedings. Owners will often turn to professional business evaluators for an objective estimate of the value of the business. KEY TAKEAWAYS Business valuation determines the economic value of a business or business unit. Business valuation can be used to determine the fair value of a business for a variety of reasons, including sale value, establishing partner ownership, taxation, and even divorce proceedings. Several methods of valuing a business exist, such as looking at its market cap, earnings multipliers, or book value, among others. What Is a Business Valuation? A business valuation, also known as a company valuation, is the process of determining the economic value of a business. During the valuation process, all areas of a business are analyzed to determine its worth and the worth of its departments or units. A company valuation can be used to determine the fair value of a business for a variety of reasons, including sale value, establishing partner ownership, taxation, and even divorce proceedings. Owners will often turn to professional business evaluators for an objective estimate of the value of the business. KEY TAKEAWAYS Business valuation determines the economic value of a business or business unit. Business valuation can be used to determine the fair value of a business for a variety of reasons, including sale value, establishing partner ownership, taxation, and even divorce proceedings. Several methods of valuing a business exist, such as looking at its market cap, earnings multipliers, or book value, among others. 1:10 Watch Now: How to Figure Out a Business Valuation The Basics of Business Valuation The topic of business valuation is frequently discussed in corporate finance. Business valuation is typically conducted when a company is looking to sell all or a portion of its operations or looking to merge with or acquire another company. The valuation of a business is the process of determining the current worth of a business, using objective measures, and evaluating all aspects of the business. A business valuation might include an analysis of the company's management, its capital structure, its future earnings prospects or the market value of its assets. The tools used for valuation can vary among evaluators, businesses, and industries. Common approaches to business valuation include a review of financial statements, discounting cash flow models and similar company comparisons. Valuation is also important for tax reporting. The Internal Revenue Service (IRS) requires that a business is valued based on its fair market value. Some tax-related events such as sale, purchase or gifting of shares of a company will be taxed depending on valuation. 1 Estimating the fair value of a business is an art and a science; there are several formal models that can be used, but choosing the right one and then the appropriate inputs can be somewhat subjective. Methods of Valuation There are numerous ways a company can be valued. You'll learn about several of these methods below. 1. Market Capitalization Market capitalization is the simplest method of business valuation. It is calculated by multiplying the company’s share price by its total number of shares outstanding. For example, as of January 3, 2018, Microsoft Inc. traded at $86.35. 2 With a total number of shares outstanding of 7.715 billion, the company could then be valued at $86.35 x 7.715 billion = $666.19 billion. 2. Times Revenue Method Under the times revenue business valuation method, a stream of revenues generated over a certain period of time is applied to a multiplier which depends on the industry and economic environment. For example, a tech company may be valued at 3x revenue, while a service firm may be valued at 0.5x revenue. 3. Earnings Multiplier Instead of the times revenue method, the earnings multiplier may be used to get a more accurate picture of the real value of a company, since a company’s profits are a more reliable indicator of its financial success than sales revenue is. The earnings multiplier adjusts future profits against cash flow that could be invested at the current interest rate over the same period of time. In other words, it adjusts the current P/E ratio to account for current interest rates. 4. Discounted Cash Flow (DCF) Method The DCF method of business valuation is similar to the earnings multiplier. This method is based on projections of future cash flows, which are adjusted to get the current market value of the company. The main difference between the discounted cash flow method and the profit multiplier method is that it takes inflation into consideration to calculate the present value. 5. Book Value This is the value of shareholders’ equity of a business as shown on the balance sheet statement. The book value is derived by subtracting the total liabilities of a company from its total assets. 6. Liquidation Value Liquidation value is the net cash that a business will receive if its assets were liquidated and liabilities were paid off today. This is by no means an exhaustive list of the business valuation methods in use today. Other methods include replacement value, breakup value, asset-based valuation, and still many more. Accreditation in Business Valuation In the U.S., Accredited in Business Valuation (ABV) is a professional designation awarded to accountants such as CPAs who specialize in calculating the value of businesses. The ABV certification is overseen by the American Institute of Certified Public Accountants (AICPA) and requires candidates to complete an application process, pass an exam, meet minimum Business Experience and Education requirements, 3 and pay a credential fee (as of Mar. 11, 2022, the annual fee for the ABV Credential was $380). 4 Maintaining the ABV credential also requires those who hold the certification to meet minimum standards for work experience and lifelong learning. Successful applicants earn the right to use the ABV designation with their names, which can improve job opportunities, professional reputation and pay. In Canada, Chartered Business Valuator (CBV) is a professional designation for business valuation specialists. It is offered by the Canadian Institute of Chartered Business Valuators (CICBV). Compete Risk Free with $100,000 in Virtual Cash Put your trading skills to the test with our FREE Stock Simulator. Compete with thousands of Investopedia traders and trade your way to the top! Submit trades in a virtual environment before you start risking your own money. Practice trading strategies so that when you're ready to enter the real market, you've had the practice you need. Try our Stock Simulator today >> ARTICLE SOURCES PART OF How to Value a Company Valuing a Company: Business Valuation Defined With 6 Methods1 of 37 What Is Valuation?2 of 37 Valuation Analysis: Meaning, Examples and Use Cases3 of 37 Financial Statements: List of Types and How to Read Them4 of 37 Balance Sheet: Explanation, Components, and Examples5 of 37 Cash Flow Statement: How to Read and Understand It6 of 37 6 Basic Financial Ratios and What They Reveal7 of 37 5 Must-Have Metrics for Value Investors8 of 37 Earnings Per Share (EPS): What It Means and How to Calculate It9 of 37 P/E Ratio - Price-to-Earnings Ratio Formula, Meaning, and Examples10 of 37 Price-to-Book (PB) Ratio: Meaning, Formula, and Example11 of 37 Price/Earnings-to-Growth (PEG) Ratio: What It Is and the Formula12 of 37 Fundamental Analysis: Principles, Types, and How to Use It13 of 37 Absolute Value: Definition, Calculation Methods, Example14 of 37 Relative Valuation Model: Definition, Steps, and Types of Models15 of 37 Intrinsic Value of Stock: What It Is, Formulas To Calculate It16 of 37 Intrinsic Value vs. Current Market Value: What's the Difference?17 of 37 The Comparables Approach to Equity Valuation18 of 37 The 4 Basic Elements of Stock Value19 of 37 How to Become Your Own Stock Analyst20 of 37 Due Diligence in 10 Easy Steps21 of 37 Determining the Value of a Preferred Stock22 of 37 Qualitative Analysis23 of 37 How to Choose the Best Stock Valuation Method24 of 37 Bottom-Up Investing: Definition, Example, Vs. Top-Down25 of 37 Financial Ratio Analysis: Definition, Types, Examples, and How to Use26 of 37 What Book Value Means to Investors27 of 37 Liquidation Value: Definition, What's Excluded, and Example28 of 37 Market Capitalization: How Is It Calculated and What Does It Tell Investors?29 of 37 Discounted Cash Flow (DCF) Explained With Formula and Examples30 of 37 Enterprise Value (EV) Formula and What It Means31 of 37 How to Use Enterprise Value to Compare Companies32 of 37 How to Analyze Corporate Profit Margins33 of 37 Return on Equity (ROE) Calculation and What It Means34 of 37 Decoding DuPont Analysis35 of 37 How to Value Private Companies36 of 37 Valuing Startup Ventures37 of 37 Related Terms The Times-Revenue Method: How to Value a Company Based on Revenue The times-revenue method determines the maximum value of a company as a multiple of its actual revenue for a set period. more Chartered Business Valuator (CBV) A Chartered Business Valuator (CBV) is a professional designation for valuation specialists in Canada offered by the CBV Institute. more Terminal Value (TV) Definition and How to Find The Value (With Formula) Terminal value (TV) determines the value of a business or project beyond the forecast period when future cash flows can be estimated. more Modified Book Value Modified book value is an asset-based method of determining how much a business is worth by adjusting the value of its assets and liabilities according to their fair market value. more What Is Valuation? A valuation is a technique that looks to estimate the current worth of an asset or company. more Fair Value: Its Definition, Formula, and Example Fair value can refer to the agreed price between buyer and seller or the estimated worth of assets and liabilities. more Partner Links Related Articles Business people discussing in creative office ENTREPRENEURS Valuing Startup Ventures Fingers pointing to the word valuation DEGREES & CERTIFICATIONS An Introduction to the Chartered Business Valuator Designation The Midsection of Man Writing on Car Insurance Paper CAR OWNERSHIP How Car Insurance Companies Value Cars A business woman using a calculator to calculate the numbers on his desk in a office. PRIVATE EQUITY & VC How to Value Private Companies FINANCIAL ANALYSIS Valuing a Company Using the Residual Income Method How To Value Real Estate Investment Property REAL ESTATE INVESTING How to Value Real Estate Investment Property