What is a Business Valuation - the methods used to value a business in South Africa
Business Valuation is the process of determining the worth of an asset or company. It involves making assumptions and considering conditions, using the data that is available at a specific date. When selling your business, you want to prove to the prospective buyers that your business is expected to generate future cash flows resulting in future profitability.
It is important to take note of whether discounts or premiums should apply based on off balance sheet items that are not visible to the eye by just looking at the financials. These are qualitative aspects that could influence the value of the business by impacting indirectly on parts of the business.
The drivers for Business Value
- Financial leverage
- Asset types
- Future performance
- Cash flows
- Financial expected return
The Process of Business Valuation
- Obtain in depth understanding of the business and its ownership interest and structure
- Perform a thorough financial and qualitative analysis
- Consider all three valuation approaches
- Consider valuation adjustments (eg discounts or premiums)
- Reconcile indicated values to arrive at a conclusion of value
- Present findings in a report
What are the Risk Factors in Business Valuation
External risks
- Expectations of the economy
- Existing conditions in the economy
- Expectation of the industry
- Existing conditions in the industry
- Competitive environment
Internal risk
- Expectation of the business
- Financial position / conditions of the business
- Competitive position of the business
- Nature and size of the business
- Quality and depth of management
Investment risk
- Risk factors of the investment
- Amount invested in the business
- Expectation in capital appreciation
- Expectation in liquidity of the investment
- Level of expected management burden
Frequently asked questions
How do you calculate the valuation of a business
A company's value is determined by its revenue. Revenue is calculated by subtracting operating expenses from total revenue and multiplying it by an industry multiple. The industry multiple is an average of what companies usually sell for in the given industry based on various metrics.
This is the most basic form of business valuation. There are other methods like the weighted average cost of capital. It is good practice to value based on the other models to determine a fair price.
What are the three methods of business valuation
Types Of Company Valuation Methods
Commonly used for establishing the economic value of businesses are three main types of valuation methods:
each method has its own advantages and drawbacks.
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