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What is the Best Way to Determine the Valuation of a Company?

By Patti Kate
Updated May 17, 2024
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There are several ways to determine the valuation of a company, including hiring a professional valuation service or business appraiser. Using the company's cash flow for reference, one can also search online for a calculator that can estimate the value. Intangible assets are an excellent way to determine the valuation of a company as well. This would include skills of employees and established customer loyalty to the business.

Using a strategy known as a business valuation approach is a way to determine the valuation of a company. This involves considering major aspects of the business, such as marketing, income, and assets. For instance, marketing valuation will estimate the market value of the company in comparison to the economic achievements of the company.

When a business owner wishes to sell or transfer his business, a professional business appraisal can help evaluate a company's worth. This is primarily helpful for a privately owned business. Commercial lenders and investors often hire business appraisers to help estimate a company's valuation. The appraisers will generally accomplish this with a method called valuation modeling.

Realistically, there is no single method to calculate the value of a company. Several strategies are generally necessary to determine an accurate valuation. Estimating revenues, calculating debt payments, and determining cash flow are typically all part of the process. Estimating the company's assets will involve estimating the value of everything owned by the company, as well as the amount of money the business has currently available.

Another major aspect to consider are company expenses. Accounts payable, employee wages, mortgages, and loans for transportation should all be estimated for accuracy. Upon completion, the next step is to deduct that sum from the company's assets.

Other methods of assessing valuation involve examining a company's adjusted book valuation and estimates for future earnings. The adjusted book value reflects a company's assets as well as liabilities. Future earnings potential can be applied to a several-step method when assessing a company's worth.

If a business owner has received a professional appraisal for his company's valuation, it must be up to date to remain accurate. A valuation report from five years ago may be significantly different than current estimates. An appraisal that is less than 12 months old will be most accurate.

Every strategy for determining the valuation of a company or business has some advantages and disadvantages. For example, hiring a professional valuation service or appraiser may be very costly. An appraiser or service uses scientific methods that may be the most accurate, however. Conversely, when estimating the valuation of a private company, the owner will typically have a good idea of estimated values based on similar companies in the industry.

WiseGEEK is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.

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