ESTIMATING THE VALUE OF A BUSINESS

The ultimate measure of a business’s cumulative success is its value.valuing a business is an art, and there are a number of different techniques, which may produce different valuations for the same business.Essentially, a business is what someone is willing to pay for it!Some of the techniques used in the valuation of a business are:

*Discounted cash flows (DCF) –  Valuation= present value of estimated future cash flows
Arguably, this is the most accurate method of valuation, but it relies on access to information and the quality of the  estimations used.

*Income multiples-     Valuation = ‘income’ x  multiple
Price/earnings (P/E) ratios are valuation multiples for publicly listed companies.The long-term average P/E  multiple for listed companies is around 15.This means that valuations are on average 15 times earnings.But one  should be aware of the wide variations which take place in P/E ratios, with the economy and across companies,  industries and countries.Unlisted business can use a reduced P/E ratio from a similar listed company, for an  appropriate valuation.The reduction should reflect the difference in selling private versus public company  shares.Revenue multiples are an alternative to earning multiples and use a price/sales ratio.They are useful for    businesses with fluctuating profits or even losses, as revenue should be more stable.

*Asset based valuations –      Valuation = net assets value
This method is a useful minimum benchmark of a business’s value.The value of net assets in the balance sheet is  often based on historic costs, which do not fully reflect the future growth potential of a business.

*Valuing a business for sale – Valuations are rarely the actual price paid by a buyer in the event of a business  sale.The range of values are used by buyers and sellers of businesses simply as a starting point for  negotiations.Other factors affecting value are:

>>The strategic reasons for buying or selling.
>>The number of competing buyers and sellers
>>The negotiation skills of both buyers and sellers.
>>The state of the economy.
>>If the purchase price is paid in cash or in shares.
>>The views of different owners – If they all agree to the sale.
>>If the valuation is for the whole or part of a business.

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