<p>Whether you plan to <a href="https://www.biznestbazaar.com/blog/8-things-to-consider-while-selling-your-business">sell your business</a> entirely, or issue its shares, bonds, or debentures, or opt for a merger or acquisition with another business, a proper business valuation is essential. Business valuation allows you to assess and follow the right procedures to estimate your business value or its economic worth accurately.&nbsp;</p><p>&nbsp;</p><p>Although determining fair value may appear challenging and overwhelming, applying appropriate financial expertise can make it manageable. Below are the key insights to help you evaluate the financial worth of your business.&nbsp;</p><p>&nbsp;</p><p><strong>6 Methods to Calculate Business Valuation&nbsp;</strong></p><p>&nbsp;</p><p>While you might need professional help to objectively estimate your business's value, here are six business valuation methods that will keep your valuation process intact. The valuation itself depends on different factors, such as the company's capital structure, management, revenue, earning prospects, and many more.&nbsp; However, the fundamental business valuation methods include the book value approach, discounted cash flow, market capitalization, market value, liquidation, and return on investment (ROI) approach.&nbsp;</p><p>&nbsp;</p><h3><strong>Book Value Approach</strong></h3><p>&nbsp;</p><p>This is the simplest form of valuation, which involves subtracting the company’s total liabilities from its total assets. Although the approach is fairly simple for the analysis, as calculation is part of the balance sheet, some business ventures consider this unreliable. In fact, the historical cost accounting method and the principle of conservatism prevent a direct equivalence between balance sheet figures and true value.</p><p>&nbsp;</p><p>Also read: <a href="https://www.biznestbazaar.com/blog/compliance-checklist-for-private-business-operations-in-nepal">Compliance Checklist for Private Business Operations in Nepal</a></p><p>&nbsp;</p><figure class="image"><img src="https://api-v1.biznestbazaar.com/public/blog_media/2_ik2QY5S.png"></figure><h3>&nbsp;</h3><h3><strong>Market Capitalization Approach&nbsp;</strong></h3><p>&nbsp;</p><p>Market capitalization is one of the simplest methods of business valuation. It is based on calculating the price of equity and the number of shares present.&nbsp;</p><p><i><strong>Market capitalization= Total number of shares x Value of each share</strong></i></p><p>&nbsp;</p><p>For example, if A company has the total number of 10000 shares, of which the value of each share is 1500, then the company’s total worth becomes 15000000.&nbsp;</p><p>&nbsp;</p><p>As the calculation is based only on the company's equity, negating the company's debt, the debts are taken as the investment or <a href="https://www.investor.gov/introduction-investing/investing-basics/investment-products/bonds-or-fixed-income-products/bonds">bond investor</a> in the future prospects, and these obligations are repaid with interest over a specified period</p><p>&nbsp;</p><figure class="image"><img src="https://api-v1.biznestbazaar.com/public/blog_media/3_0Fpj8pq.png"></figure><h3>&nbsp;</h3><h3><strong>Discounted Cash Flow Approach&nbsp;</strong></h3><p>&nbsp;</p><p>DCF analysis focuses on determining a company's worth by forecasting the cash it's expected to generate. This calculation involves determining the present value of those future cash flows, factoring in the discount rate and the time frame under consideration.&nbsp;</p><p>&nbsp;</p><p><i><strong>DCF = Terminal Cash Flow / (1 + Cost of Capital)&nbsp;</strong></i></p><p>&nbsp;</p><p>This method also considers inflation while deciding the current cash value. Thus, whenever the valuation of business is done by this method, it depends upon the company’s ability to generate liquid assets. However, the technique can be challenging in terms of accuracy as the calculation depends on the company's terminal value, which varies depending on the future prospects and discount rates determined. Terminal value means the value of the company after the forecast period.&nbsp;</p><p>&nbsp;</p><figure class="image"><img src="https://api-v1.biznestbazaar.com/public/blog_media/4_NTjLsoJ.png"></figure><p>&nbsp;</p><p>Also read: <a href="https://www.biznestbazaar.com/blog/a-comprehensive-guide-to-securing-startup-funding-in-nepal">A Comprehensive Guide to Securing Startup Funding in Nepal</a></p><h3>&nbsp;</h3><h3><strong>Return on Investment Approach</strong></h3><p>&nbsp;</p><p>While all the other approaches mentioned above focused on the valuation process being based on the company itself, this approach concentrates on the investor. Any <a href="https://corporatefinanceinstitute.com/resources/wealth-management/investor/#:~:text=Who%20is%20an%20Investor%3F,of%20getting%20a%20higher%20profit.">investor</a> is interested in investing in any company after being convinced of the profitability and ROI within a specified period. Investors are always interested in knowing how long it will take to recover the original amount and how much net income they will receive out if the investment.&nbsp;</p><p>&nbsp;</p><p>For example, if you pitch your business to a group of investors and promise to pay them 30% of the total profit for an investment of 360,000. To calculate the business worth, you need to divide the total investment by the percentage offered, here, the total worth of your business will be 1,200,000.</p><h3>&nbsp;</h3><h3><strong>Liquidation Approach&nbsp;</strong></h3><p>&nbsp;</p><p>This approach is not frequently used and opted for while terminating a company through the <a href="https://www.biznestbazaar.com/blog/legal-process-of-selling-a-private-business-in-nepal">legal process</a>. This involves converting all the company’s assets into liquid cash and paying off all the liabilities to determine the company's value. One of the shortcomings of this approach is that the company’s valuation will likely be lower than usual because the liquidation value amounts to less than the actual market value.&nbsp;</p><p>&nbsp;</p><p>Also read: <a href="https://www.biznestbazaar.com/blog/compliance-checklist-for-private-business-operations-in-nepal">Compliance Checklist for Private Business Operations in Nepal</a></p><h3>&nbsp;</h3><h3><strong>Market Value Analysis Approach&nbsp;</strong></h3><p>&nbsp;</p><p>Business owners widely use this approach before hiring professional business valuation experts. It involves analyzing the company's market value last sold or how other companies of the exact nature are valuated. However, if a similar nature of the company has recently been sold off for a lower price, it might impact the valuation of your company.&nbsp;</p><h2>&nbsp;</h2><h2><strong>Connect to Biznest Bazaar&nbsp;</strong></h2><p>&nbsp;</p><p>The <a href="https://www.biznestbazaar.com/hire-professional">Biznest Bazaar team</a> is here to assist you throughout the process of the sale of your business. Whether you are seeking legal assistance or valuation assistance, our team of experts is here to serve you. Go to the ‘Hire a Professional’ section to seek out assistance or contact us at <a href="mailto:info@biznestbazaar.com">info@biznestbazaar.com</a>.&nbsp;</p><p>&nbsp;</p><p>Also read: <a href="https://www.biznestbazaar.com/blog/buying-a-franchise-vs-independent-business">Buying a Franchise vs. Independent Business</a></p><p>&nbsp;</p><p><strong>Disclaimer</strong>: The information provided here is for informational purposes only and should not be considered as legal advice. Please consult with a qualified legal expert for professional legal opinions. You can also consult with our <a href="https://www.biznestbazaar.com/hire-professional">professionals</a> for further assistance.</p>

How to Properly Valuate Your Business? 6 Important Methods

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