In a business world where competition is the order of the day, it is best that new entrepreneurs and investors take a time to analyse the different method for a business evaluation. This analysis is not limited to investment bankers and corporations but also small businesses and startups in Africa can benefit from understanding how these business evaluation works.
Today, every hard working business owner would always want to evaluate their business to help them stay away from challenges and also support them in ensuring that their business is sound. A lot of loop holes are found in auditing and evaluation of any business which is the reason, before a buyer can go for a business, valuation must be carried out.
The different ways of estimating the value of business when it comes to its value and the business position aside its revenue is what a business evaluation is all about. There are four common methods of business evaluations methods.
- Market Valuation
- Discounted Cash Flow (DCF) Analysis
- Multiples Method
- Comparable Transactions Method
The Market Valuation Method
The easiest way of evaluating a company that issues shares is the market valuation method. This method is mostly used on large corporations that are registered on any stock exchange platform. It is very easy to get information about these companies because they are public and calculate the market capitalization of these companies. This can be done when there is a company’s multiplication of the stock prices by the company’s number of shares that are outstanding for its equity market value.
Discounted Cash Flow (DCF)
This is a business evaluation method that is commonly use to check the company’s value. There are tools that are used in doing this,
- Weighted Average Cost of Capital (WACC)
- Adjusted Present Value (APV)
This is carried out by the calculation of the company’s Free Cash Flows (FCF) and also its net present value (NPV) of its Free Cash Flows.
This method is the commonest method that is used in evaluating a company through its price to earnings multiples that is also called the P/E ratios. This is carried out when the company’s current equity value has been divided by the company’s recent net company. The end of this calculation would give the price-to-earnings multiple.
Comparable Transactions Method
The final method of business evaluation is the comparable transactions method. This take cares of a certain extent on a company’s multiples. When using this method, it is advisable that the comparable transactions of the company is paralleled to another business that has the same model and then it can be evaluated with methods like the Enterprise Value-to-EBITDA. However, because it may not be possible to get companies with similar targets, it is imperative that the appraisers make use of the data that is available.
These methods have been used to ensure that a business is able to stand out in the competitive market. Professionals are hired to carry out any business evaluation. The above listed methods may not be easy to understand by a lay man if care is not taken to explain these processes.