Company Valuation

 
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Company valuation is a systematic procedure for estimating the economic value of a business. It is a single value that represents the value of all the other components like brand value, insolvency, and debtor's turnover that together form a company's value. It is done under many circumstances like at the time of mergers & acquisitions, reorganization, raising public funds, and winding up of the business.

Some of the common methods of company valuation are:

Asset valuation - Under this method, the value of assets of a company is determined by calculating the fair market value of the assets, the improvement cost of all the assets held under lease, and the value of inventory that includes finished goods, work-in-progress, and raw materials. It is ideal for valuating manufacturing businesses because their maximum investment is in assets such as machinery, equipment, power units, etc.

Capitalization of income valuation - This is suitable for valuating organizations like business consultancy firms, professional firms, etc. because they are not asset-intensive in nature. The success of their business depends upon the quality of service and not on the level of output produced and sold. The items that can be included for the purpose of valuation are discretionary. Ideally, one can use the location of a business, client portfolio, technical expertise, profit and loss trends, and portfolio of debtors and creditors.

Market valuation - Under this approach, a multiplier formula for every industry is calculated depending upon the average sales figures of various companies in the industry. One can simply substitute figures in the formula to derive the value.

 
 

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