How to value a company: Valuation tips and methods

Piotr Kłodziński|
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Company valuation is a crucial process that usually holds great importance in the business world. Regardless of whether you are an entrepreneur who wants to sell your company or an investor looking for valuable opportunities, understanding how to value a company or enterprise is extremely important. In this article, we will discuss various assessment methods and steps for valuing a business or shares in a commercial company.

1. How to value a company?

Company valuation is the process of determining its value at a given point in time. There are several methods that can be used for this purpose, each of which has its advantages and limitations.
There is no perfect method - most often, it is a combination of several methods and the average of them that allows a good valuation of a given company.

Income method:

One of the most frequently used methods is the income method. It involves estimating the company's future revenues and converting them to present value using an appropriate discount factor. This is an approach often used by investors because it focuses on the company's ability to generate profits in the future.

Of course, depending on the industry, companies are sold for even half a year or even 12 years of profit. However, we are usually talking about 2 to 6 years of profit, depending on the industry
and attractiveness of the location. Fixed assets, especially real estate, are often added to this value, often according to the estimated value on the "repayment date" of the buyer's company - e.g. in 4 years.

Comparison method:

Another popular method is the comparative method, which involves comparing the company's value with the values of other similar companies on the market. This method is based on the analysis of share prices or other data on transactions taking place in the same or similar market. This is a more subjective approach, but can be very useful as a reference point.

Substantial value method:

This method is based on the valuation of company assets, such as real estate, equipment, shares and other resources. After subtracting the company's liabilities from the total value of its assets, we obtain substantial value. This method is particularly useful for companies with significant physical resources.

Cash flow method:

The cash flow method, also known as DCF (Discounted Cash Flow), involves forecasting a company's future cash flows and discounting them to present value. This is a particularly useful approach to valuing companies with uncertain future earnings.

2. How to value a business activity?

The valuation of a business may be slightly different than the valuation of a corporation because it often involves individual businesses that may differ in their structure and nature of business. Nevertheless, there are certain steps you can take to assess the value of such an activity.

Financial analysis:

The first step is to conduct a thorough financial analysis of the business. This includes examining its income, expenses, assets and liabilities. Analysis of this data allows for a better understanding of the company's profitability and stability, as well as its development prospects.

Asset and resource assessment:

As with business valuation, it is important to identify and value the business assets and resources. These can be both tangible assets such as real estate, equipment, vehicles, furnishings or even works of art, and intangible assets such as a brand or customer base. What is important, however, is how much they can be monetized. The value of commercial information is often greatly overestimated by business owners.

Risk assessment:

When valuing a business, you should also take into account the risks associated with running a business. Factors such as market stability, competition, legal regulations and others may affect the value of the company. After all, we live in a country with extremely low legislative stability.

3. What is the company's value? What is the value of the company? 

Goodwill may be interpreted differently depending on the context and purpose of the valuation. For an investor, the value of a company may mean the potential for growth and generating profits, while for an entrepreneur it may be the amount for which he is ready to sell his company. Most often, however, it is about the second value - how much I could get for my company today.
Determining the value based on all the methods described above will usually give the best answer. However, it is worth listening to someone who has recently sold a similar company or participated in such a transaction - he or she may point out additional elements that are worth taking into account during the valuation.

4. How to value a company for sale?

Valuing a company for sale may be more complicated because it requires taking into account not only the company's value, but above all depends on the potential market interest. We may, after all, be the owners of a company that, from our perspective, brings outstanding profits and should be sold for a lot of money - but at the moment no one will be interested in it for some reason. To sum up, everything is worth what someone else is willing to pay for it.
Sometimes, when the price is unsatisfactory, it is worth running your business for a while longer.

5. How much is a share of the company worth? Does the value of a few percent of shares in the company accurately reflect the value of the entire company?  

When you buy an entire company, you are paying for all of its assets, liabilities, and future growth potential. The value of this transaction will therefore be higher than the purchase price for only part of the shares. When you buy an entire company, you usually have more control over its operations and decision-making. You can also introduce your strategies and changes without consulting other co-owners.

6. How to value your business?

Valuing your own business yourself can be emotionally involved, so it's important to approach the process objectively. Get professional help to address any risk factors and growth prospects. Generally, you can think about 2 to 6 years of profit and add the market value of the property and what is in the company account.

Conclusion: Company valuation is a very important process that requires taking into account many factors and assessment methods. Whether you want to sell your business or simply assess its value, it is important to take the appropriate steps and seek professional help to make the most accurate assessment possible.
Having completed over a hundred such transactions, we can be your guide - please contact us Office. We guarantee good negotiations.

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