How to evaluate the value of a company?

It is the big question of the transmission: how to evaluate the value of a company? Here is a look at the methods used to set a selling price. 

Methods for assessing the value of a business

Assessing the value of a company can be a complex task. Whether you’re selling assets, a business, or company shares, there are typically three approaches to determining the sale price of a company.

Evaluating a Company’s Value: A Three-Pronged Approach

There isn’t a one-size-fits-all method for estimating a business’s price. The ideal approach is to utilize a combination of methods. Employing multiple methods strengthens your position during negotiations.

1. The Asset-based Approach

The fundamental method involves adding the value of the assets and subtracting the debts or liabilities. This results in the net situation or the net book value. Adjustments must be made depending on the company’s age and the assets’ nature. Tangible assets (equipment, fixtures, etc.) are valued based on their current state and depreciation. Assets that have depreciated or appreciated, such as goodwill, inventories, real estate, or land, should be revalued. Any off-balance-sheet liabilities or liquidation should also be considered.
This method is suitable for valuing a craft business or a small-scale business with a few employees and usable tools and equipment. While it provides an economic value, it does not account for current profitability, future potential, or the strength and loyalty of the customer base.

2. The Comparative Approach

This method involves evaluating the value of a company relative to its competitors’ values. The company for sale is compared with other businesses of a similar profile that have recently been part of a transaction, allowing the determination of the market value. This comparison draws on data from professional organizations, unions, federations, and chambers of commerce.
This technique is useful when considering a trade or craft business acquisition. It involves a type of scale, based on the company’s activity and geographical area. However, the value obtained is a range that can vary significantly based on the turnover. It does not help determine the most appropriate financial arrangement for the business acquisition.

3. The Economic Approach

This approach involves evaluating the company’s future profitability. By looking at the revenues of the past few years, we can extrapolate the company’s value at a certain point in time. This is done by dividing the company’s “typical” result by the discount rate. This technique ensures that the company will be capable of generating profits. Additionally, the risk of not achieving these profits is factored into the calculation.
The beauty of this method is that it can be used by both the seller, who bases calculations on past performance, and the buyer, who makes future projections. It also aids in devising the most advantageous financial arrangement for both parties, making it easier to calculate loan repayments based on future results.
If you’re planning to sell your business, don’t miss Actoria’s advice on how to set the right price for your company. Feel free to contact our expert consultants for more information.