Learn how to value a company like an expert

How to value a company using these four proven methods

Whether you are on the buy-side or sell-side of a transaction, an accurate company valuation is crucial to getting the most out of it. So, for that reason, we like to show you how to value a company in the proper way.

Market capitalization

One of the simplest ways to gauge the worth of a publicly listed company is through market capitalization. It is determined by dividing the total number of shares by the market price.

Since a combination of debt and equity finances most businesses, one drawback of market capitalization is that it only takes into account the value of the stock. Bank or bondholder bets on the company’s future are called debt; these obligations are paid back over time with interest. Equity is the term used to describe stockholders who have a claim to future profits and own shares in the company.

Book value

You can make this with calculations based on your tangible assets, including material possessions like buildings, land, equipment, and stock. Calculate your assets less your obligations to arrive at the value based on your net assets. You will need to update your balance sheet to account for factors like inflation and depreciation in this computation.

Calculating the worth of your net assets is an excellent place to start. Still, this sum excludes more intangible assets, such as intellectual property, trademarks, patents, and logos.

Discounted cash flow (DCF)

Discounted cash flow is a different way to value a company. The method of determining the worth of a business or investment based on the money, or cash flows, is known as discounted cash flow analysis. The method determines the present value of potential future cash flows based on the discount rate and the analysis period.

The method can reflect a company’s capacity to produce liquid assets. The difficulty with this valuation is that its correctness depends on the terminal value, which might change depending on the future growth and discount rate assumptions you make.

Comparable company analysis (CCA)

The comparable company analysis is a popular and direct method for determining the price of a company by contrasting the valuation multiples of the target company with those of its industry rivals.

A direct competitor would be the best option for this purpose. The company you select for comparison should be from the same industry, have a similar size, and have a similar rate of growth. Comparing businesses with comparable traits is done so that, if all other factors are equal, these businesses should trade at comparable multiples.

Many companies with related businesses are chosen, and they use the averages of their valuations or multiples to comprehend how the target company fits inside the industry.

To determine if a company is overvalued or undervalued, ratios of comparable businesses are consulted. It’s important to compare using the appropriate company, a reasonable multiple, and the appropriate variable. 

This valuation method is simple to compute using readily accessible data. On the downside, this method is less accurate, and it could be challenging to identify an adequate comparable, especially for small organizations.

Factors to consider before company valuation

Before you start with the valuation of the company, you have to consider other factors as well, such as:

Company size

When valuing a company, company size is often taken into consideration. Generally speaking, a larger company will have a higher valuation. It’s because losing influential executives can have a bigger impact on smaller businesses with less market strength. Larger companies are also more likely to have a well-developed product or service and, thus, more available cash.

Marketing traction and growth rate

Your company is compared to its rivals when valuing a business based on market traction and growth rate. Investors are interested in learning how much of the market you control, how big your industry’s market share is, and how fast you can extend into new markets. Your business will be valued greater the sooner you enter the market.

Profit rate

As a business owner, you have to ask yourself “Is your business successful?.” If so, it’s good because companies with higher profit rates are worth more than those with lower profit rates or a loss. The key to valuing your company according to profitability.

Future growth

Other two questions to ask yourself are “Is an expansion of your market or sector anticipated?”
and “Is there a potential that the company’s product offering may grow in the future?”

The worth of your company will rise as a result of these and other variables. The value of your business will increase if investors expect future expansion.

Conclusion

As we mentioned earlier, knowing how to value a company is crucial for further business development. The practice has shown that there is no right or wrong approach in company evaluation; you should choose based on your preferences and needs. Also, you can combine a few methods in order to get a complete company valuation.

Besides the methods, other aspects that may affect the company’s valuation are the business plan, the company size, the state of the market, the management team, and future growth possibilities.