WAYS OF VALUING COMPANIES
Michael Tait, independent chairman and non executive director, highlights the five key ways of valuing companies.
Valuing a private company can be a complex and challenging process. Unlike public companies, private companies do not have a publicly traded stock, which makes it more difficult to determine their value. However, there are several methods that private companies can use to determine their value. This article explores the most commonly used methods for valuing private companies.
1. Asset-Based Valuation: This method involves valuing a company based on its assets, including cash, real estate, equipment, and inventory. The value of the assets is then subtracted from any liabilities to determine the net worth of the company. Asset-based valuations are commonly used for companies with a significant amount of tangible assets, such as real estate or manufacturing companies.
2. Earnings-Based Valuation: This method involves valuing a company based on its earnings potential. The company’s financial statements are analysed to determine its historical earnings, and projections are made to determine its future earnings potential. The value of the company is then determined by applying a multiple to its earnings, such as a price-to-earnings ratio. This method is commonly used for companies with a strong track record of earnings, such as technology or service companies.
3. Market-Based Valuation: This method involves valuing a company based on its market position and the value of similar companies in the same industry. The market-based valuation takes into account the size, growth rate, and profitability of the company, as well as the value of its competitors. This method is commonly used for companies in highly competitive industries, such as retail or technology.
4. Discounted Cash Flow Valuation: This method involves valuing a company based on its future cash flows. Projections are made for the company’s future cash flows, and a discount rate is applied to account for the time value of money. The present value of the future cash flows is then determined, and the value of the company is determined by subtracting any liabilities from the present value. This method is commonly used for companies with a strong potential for future cash flows, such as technology or biotechnology companies.
5. Comparable Transactions Valuation: This method involves valuing a company based on the value of similar companies that have been sold or publicly traded. The value of these transactions is used to determine the value of the company being valued. This method is commonly used for companies in industries with a history of transactions, such as technology or retail.
In conclusion, there are several methods that private companies can use to determine their value. The most appropriate method will depend on the specific company and its industry. It is important for private companies to understand the strengths and limitations of each method, and to seek the advice of a professional valuation expert to determine the most accurate value for their company.
https://online.hbs.edu/blog/post/how-to-value-a-company
https://www.investopedia.com/terms/b/business-valuation.asp