When you buy out a company, you are not only buying the profits, as nice as that would be. You also take on the company’s stock and equity as well as assume any debts including bonds and loans. Now you have complete control of the company. Because of this, investing in business valuation services and business appraisal services is extremely worth it in order to find out exactly what kind of place the company is in and if it’s worth it to buy it. Small business valuations are easier to do, of course but it is still recommended to find an experienced company to do the comparables valuation and everything else for you. The following four techniques are how to determine the value of a company’s equity.
Discounted Cash Flow Analysis
This analysis is probably the best way to find out the value of a company. Through the adjusted present value and the weight average cost of capital, it is quite thorough in recognizing value. For both types of methods, you will require a formula to calculate the flow of free cash and the net present value of the free cash flow. If you can use this method alone to determine the value of a company, your life will be very easy. But typically, you will need to combine this with one of the following techniques. This is necessary because if nothing else, you want to be able to check your work and make sure your analysis is correct.
Comparables Valuation
The comparables valuation method looks mainly at any transactions that have happened within other companies that are similar to the company you are valuing and compares them. When you are making a comparables valuation, you need to look for a key valuation parameter. Without this, you won’t be able to find the comparative value. For example, are these companies being valued as EBIT, EBITDA, revenue or something else? Finding the key valuation parameter helps you to be able to look at the multiples of all the parameters thus making it possible to value your company in a similar fashion.
Multiples Method
This technique can actually overlap the comparables valuation somewhat. When there is not enough information available to determine the value of a company by simply using the comparable transactions you can look at the market valuations. This means scrutinizing the price and earning multiples such as PE ratios as well as EBITDA multiples and more. In the same way that you would look at other company’s transaction in the comparables method, you would look at what multiples are used for different companies that are in the same industry as the one you are valuing and use those to value your company.
Market Valuation
This is the height of business valuation. The market valuation is done in the case of a free market when the demand and supply effects and a direct impact on the value of the business. If the purchasers do not want to spend more than they have already offered for the company and the sellers are not ready to go lower, or even sell at all, the market approach can find out the value of the firm by looking at other firms that work with this company side by side. The market value of shares that the company has publicly traded will make a big difference in convincing the selling company to concede.
The value of the debt is easy to calculate for the most part, but the above methods will help to evaluate the company’s equity value. Once that is done, the potential buyer (you, in this case) can compare the equity value to the debt amount and determine whether or not this will be a beneficial purchase to their current company, business or situation. When the debt is high, it can be a little off putting because the new buyer will be responsible for paying it off. However, if the equity is high enough, profits have the potential to eventually pay off that debt and begin to bring in revenue. Making that decision always comes with an element of risk but if you can find a trustworthy, reliable and knowledgeable valuation company to do all your analysis work for you, you can eliminate a lot of that risk.