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Business Valuation and Its Key Market Drivers
Post By: admin June 10 2021

Business Valuation and Its Key Market Drivers

Business valuation is a subject that is of interest to a wide range of stakeholders especially, the investors. The process of business valuation can sometimes be challenging when too many uncertain factors are involved. Nevertheless, it stays as a distinguished tool to draft and make informed investment decisions.

What is meant by business valuation?

Business valuation majorly refers to deriving the present value of any company. In determining the present value, there are so many intrinsic factors that are to be considered such as the estimated performance results for a foreseeable future, based on the present potential and capacity of the company. Also the market value of the assets held by the company can also play as a major element in calculating the value. 

What is the significance of business valuation?

Business valuation is always a crucial process to derive the true value of any asset or business. And there by knowing the true value, the business valuation stands as a fundamental milestone in the path to align the business operations in any given present situation to achieve the desired results in future. The importance of making right investment decisions at the right time is undeniable and the valuation results in business always endow the inputs as they should be to make the strategic and potential investment decisions. For example, if you are engaged in business and are now facing one of the major decisions with respect to the expansion plans, you may be receiving various investment options with different price ranges. One of the essential parts of due diligence in analyzing each of those investment options is to determine whether those prices actually reflect the true value of them and in that case, valuation experts can help you in doing this analysis for you.

What are the various methods for business valuation?

Most commonly used business valuation methods are Asset based, Income based and Market value based methods. It is to be noted that there are other methods such as the one based on the price of recent purchase of similar asset or business. The selection of appropriate methods for valuation will depend upon the sorting out of the one which is compatible with the size and nature of the business in context.

The key aspects of the commonly used valuation methods are as below:

  • Asset based method – This approach mainly focuses on the underlying assets of the company or business. The idea behind this method is to calculate the cost of rebuilding the entire business in the current status of its capacity and utility. This type is more suitable for the businesses which are majorly asset driven, such as the ones with the nature of business being the trade of its assets. 
  • Income based method – This involves calculating the present value of the prospective earnings or expected future cash flows from the subject business. Appropriate discount rates are to be used to arrive at the present value after considering the risks and challenges associated with the projected future incomes.
  • Market value based method – This approach is feasible only if the market value of similar business is easily available or derivable. If the value of similar business is recently declared or published which can then be used as a benchmark to compare the business which is getting valued.

For any valuation method, there are judgements and subjectivity involved which implies the importance of consulting with competent valuation experts in making suitable business decisions.

What are the key market elements that drive the process of business valuation?

The market factors to be considered will be always dependent on the specific nature of each particular valuation and have to be evaluated on a case to case basis. However, there are certain matters which will have to be assessed as checkpoints to ensure reasonable assurance on every valuation results, as discussed below:

  • Discount rates – Change in discount rates used in the valuation methods can significantly alter the results. It can be challenging to choose the appropriate discount rate as it involves factors that have great uncertainty. For example, expected inflation in the economy, projected GDP rates, estimated borrowing rate etc. are the determining factors to reach the right discount rate for any valuation method. As these factors are highly variable based on the turnout of market situations, confirming the accuracy of discount rate used can always be difficult.
  • Technological advancement – Another key factor to keep up the business value is to maintain and be updated with the relevant technological advancements in the applications used in the business. Any obsolescence in the technology used in the operations can deteriorate the value of the business enormously.
  • Other macro-economic factors – Changes in the demographic features of the region, political influences, regulatory mandates, environmental forces etc. are some of the other elements which can make substantial impact on the business valuation models and results. Being aware about these factors and any changes as applicable to the valuation, is necessary to make adequate   adjustments in the valuation workings.

CDA offers various business valuation services

CDA has a dedicated team for valuation services, equipped with refined business modelling tools and stature. We are happy to provide you with our acumen on performing various valuation services including, but not limited to, the following:

  • To help in business valuation as part of managing deals for purchase or sale of investments
  • To assist in submitting the valuation reports on time as required by regulatory authorities, based on our subject matter expertise and sector specific knowledge  
  • To support you in business modeling and related decision making processes by providing value adding insights on material transactions using our analytical and forecasting tools
  • To conduct detailed analysis on the projected performances to evaluate the prices for your identified investment opportunities