Business valuation methods
Four commonly used business valuation methods
There are various methods you can use to determine the correct value of your company. Whether you want to acquire or sell a company, this is an essential part of reaching a successful deal. And although there are several methods of company valuation, a calculation will almost always be made based on the company’s financial data and realistic profit expectations for the future. What business valuation methods are there? And when are they best applied? In this article, BrightOrange takes a closer look at the four most commonly used methods!
Business valuation by BrightOrangeWhat business valuation methods are there?
Before we discuss the four most commonly used business valuation methods, it is important to understand that every situation is unique and requires a different approach in order to come up with a reliable business valuation. The value of a business is a subjective concept and is determined on the basis of assets, liabilities, intangible assets and expectations. These business valuation methods can be used:
- Discounted Cash Flow method
- Intrinsic value method
- Goodwill valuation
- Profitability value method
- EBITDA multiple method
- Book value method
It is also common for multiple methods of company valuation to be combined in order to arrive at an accurate and correct valuation. When is each method applied? Keep reading to learn about four commonly used methods!
Methods of company valuation: DCF method
The DCF method determines the value of a company based on expected future cash flows. This is often done by converting the future cash flow to the present value over a period of five years. The DCF method is ideal for companies with stable and predictable income, but requires accurate forecasts about the future by a specialist. This method of company valuation is popular because it gives the potential buyer a good idea of what their investment could yield.
Methods of company valuation: intrinsic value calculation
Want to know how to value a company? A popular option from the list of business valuation methods is the intrinsic value method, whereby the value is determined based on current assets and liabilities. Does your company have many tangible assets? Then this is a useful way to calculate the value. However, a major disadvantage is that it does not take future market developments and profitability into account, which means that the value can sometimes be underestimated. That’s why this method is often combined with other business valuation methods to get the complete picture.
Intrinsic value formula = current value of all assets – value of liabilities that do not belong to equity.
More about this methodGoodwill valuation
How to value a company correctly? Valuation methods for companies also include appreciating goodwill. Companies don’t just have tangible assets, but also intangible ones like a strong brand name, customer relationships, and market knowledge. These types of assets are part of goodwill and also affect your company valuation. Determining the correct value in this case is a lot more complex and also involves interpretation. Therefore, an independent party is often called in to help, as they know exactly how to apply these business valuation methods.
Profitability value method
Finally, we will also take a closer look at the profitability value method, one of the most commonly used company valuation methods. The value is calculated based on future profitability. This method involves multiplying the average, normalised profit of recent years by a risk factor. The profitability value gives an idea of what the investor is willing to pay, depending on the expected profit.
Profitability value formula = normal net profit per year / required rate of return in %
So, there are other company valuation methods that together make sure a company is valued correctly and can be used for negotiations.
How to value a company properly
When we talk about applying the right valuation method, this depends on the type of company, the sector and the objective of the valuation. At BrightOrange, we have years of experience in valuations in a wide range of sectors and know how to achieve the ideal outcome in every situation. Call in our specialists and let them apply the right business valuation methods, so that you can take the next step. We are ready to help!
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Stefan Koelewijn
Consultant
Stefan Koelewijn
Consultant
Stefan Koelewijn
Consultant
“I love helping entrepreneurs with various business issues. You notice that you become in-house counsel and are therefore seen as a sparring partner. Working at Bright Orange is incredibly fun: you are challenged to make good numerical analyses and draw conclusions from them.”
Personal fact:
Fanatical footballer on the pitch and in the hall.
