Briefly explain business valuation and its purpose (also referred to as company valuation).
Select a valuation method from the introduction in the Learning Guide and describe why
you might use that method to value a business.
Business valuation is a process of determining the face value or economic value of a company
(Hayes, 2021). The process could include an analysis of the firm's capital structure, cash flows,
or prospective market value. We can also define business valuation as the process of determining
the present worth of a business by evaluating all financial aspects of a business (Corporate
Finance Institute, 2022). Investors conduct a business evaluation for several reasons including
sale value, taxation, and forming partnership agreements (Hayes, 2021).
Commonly, professional business evaluators conduct this analysis and come up with a value
based on objective criteria. Several methods are utilized in business evaluation. These
approaches or methods include the Asset-based approach, Income/Earning income approach, and
Market approach. Other than these are other approaches that are used by evaluators. From these
approaches, one of the most common methods is the book value method.
A book value method is an accounting approach that calculates the business's value using
financial statements (S. Seth, 2021). Book value of a firm would roughly be equal to the amount
that's left if all the assets are sold to pay for all the debts and obligations. Consequently, we can
say that a book value of a firm is the value an investor would get if the firm is liquidated. We can
calculate the book value of a company by deducting the total liabilities from the total assets (S.
Seth, 2021).
Book value of a company = Total assets − Total liabilities
This method is simple to calculate and understand, hence it is used commonly. Additionally, if
the company kept a proper record of its financial statements then we can get a relatively reliable
result. We can divide the book value we got from above by the number of outstanding shares to
get the book value per share (S. Seth, 2021). This will help us make a comparison on per-share,
and make an informed decision.
However, this method has its limitations that investors need to be aware of. One of the major
issues is that financial figures aren't reported monthly. Hence, an investor may need to see the
Select a valuation method from the introduction in the Learning Guide and describe why
you might use that method to value a business.
Business valuation is a process of determining the face value or economic value of a company
(Hayes, 2021). The process could include an analysis of the firm's capital structure, cash flows,
or prospective market value. We can also define business valuation as the process of determining
the present worth of a business by evaluating all financial aspects of a business (Corporate
Finance Institute, 2022). Investors conduct a business evaluation for several reasons including
sale value, taxation, and forming partnership agreements (Hayes, 2021).
Commonly, professional business evaluators conduct this analysis and come up with a value
based on objective criteria. Several methods are utilized in business evaluation. These
approaches or methods include the Asset-based approach, Income/Earning income approach, and
Market approach. Other than these are other approaches that are used by evaluators. From these
approaches, one of the most common methods is the book value method.
A book value method is an accounting approach that calculates the business's value using
financial statements (S. Seth, 2021). Book value of a firm would roughly be equal to the amount
that's left if all the assets are sold to pay for all the debts and obligations. Consequently, we can
say that a book value of a firm is the value an investor would get if the firm is liquidated. We can
calculate the book value of a company by deducting the total liabilities from the total assets (S.
Seth, 2021).
Book value of a company = Total assets − Total liabilities
This method is simple to calculate and understand, hence it is used commonly. Additionally, if
the company kept a proper record of its financial statements then we can get a relatively reliable
result. We can divide the book value we got from above by the number of outstanding shares to
get the book value per share (S. Seth, 2021). This will help us make a comparison on per-share,
and make an informed decision.
However, this method has its limitations that investors need to be aware of. One of the major
issues is that financial figures aren't reported monthly. Hence, an investor may need to see the
