What is Business Assessment?
Business valuation, also referred to as The valuation of a company is the procedure by which the economic value of an organization is established. In this process, a detailed analysis is conducted covering all dimensions of the company to determine its global value, as well as that of its different divisions or departments.
The purpose of business valuation covers a wide range of objectives, including, but not limited to, determining a fair selling price, defining ownership interests, tax issues and in situations of division of assets in divorces. It is common for business owners to seek the expertise of professional appraisers to obtain an unbiased assessment of the company's value.
Fundamental Principles of Business Valuation
The subject of corporate valuation is a central topic in corporate finance discussions, being especially relevant in contexts of total or partial sale of the company, mergers, acquisitions or other forms of corporate restructuring. This process aims to establish the company's present value through objective criteria, evaluating all aspects of the business.
A valuation analysis can consider elements such as business management, capital structure, future profitability projections and the market value of the company's assets. There are several evaluation techniques and tools, varying according to the evaluator, the company and the sector in question. Common methods include financial statement analysis, discounted cash flow models, and comparison with similar companies.
Valuation is also crucial for tax purposes, with the Internal Revenue Service (IRS) requiring that the company be valued at its fair market value. Various tax events, such as sales, purchases or donations of business interests, have their tax incidence determined based on the assessment carried out.
Six Assessment Methods
Several methods can be used to evaluate companies, as described below.
1. Market Capitalization
The most direct method, market capitalization is calculated by multiplying the current share price by the total shares issued. For example, Microsoft Inc.'s market capitalization on January 3, 2018 would be the result of multiplying the share price, $86,35, by the total shares issued, 7,715 billion, resulting in a market value of approximately US$666,19 billion.
2. Revenue Multiple
The revenue multiple applies a specific factor to the revenue stream generated over a defined period, varying depending on the sector and economic scenario. Technology companies, for example, can be valued at 3 times revenue, while services can be valued at a multiple of 0,5 times revenue.
3. Earnings Multiple
Alternatively, one can use the earnings multiple for a more accurate assessment of business value, given that profit is a more stable indicator of financial success than revenue alone. This method adjusts future profits to present value, considering the current interest rate.
4. Discounted Cash Flow (DCF)
Similar to the earnings multiple, the DCF method is based on projections of future cash flow, adjusted to reflect present value, accounting for inflation.
5. Book Value
It refers to the net value of the company's assets, calculated as the difference between total assets and total liabilities.
6. Settlement Value
This value represents the net amount that the company would receive if all of its assets were liquidated and liabilities were paid off immediately.
It should be noted that these methods represent only a portion of the multiple assessment techniques available, each suited to different business scenarios and needs.
Accreditation in Business Assessment (ABV)
In the United States, the Accredited in Business Valuation (ABV) designation is given to accounting professionals, including Certified Public Accountants (CPAs), who specialize in assessing the value of companies. The control and supervision of this certification is the responsibility of the American Institute of Certified Public Accountants (AICPA). To obtain ABV certification, professionals must complete a rigorous application process, pass a specific exam, meet the required professional experience and academic training requirements and pay an accreditation fee, which, in 11 March 2022, was set at US$380.
Continuing ABV certification requires holders to maintain a minimum level of ongoing professional experience and participate in continuing education programs. Approval in this program gives professionals the right to include the acronym ABV next to their names, increasing their career opportunities, market prestige and earning potential. At the same time, in Canada, the Chartered Business Valuator (CBV) designation identifies specialists in business valuation, and is administered by the Canadian Institute of Chartered Business Valuators (CICBV).
Conclusion
Business valuation emerges as an indispensable component in corporate management and strategy, offering a detailed view of the economic value of an organization. Whether for the purposes of sale, merger, acquisition, tax planning or even in circumstances of asset division in divorce proceedings, understanding the fair value of a company is crucial to making informed decisions.
The complexity and diversity of valuation methods reflect the variety of companies, industries and specific objectives for which valuation is performed. From straightforward methods like market capitalization to more elaborate approaches like discounted cash flow, each technique offers unique insights into a company's value, considering its assets, its ability to generate profit, and its position in the market.
In addition to being a fundamental tool for business owners and managers, business valuation also plays a crucial role in negotiations between buyers and sellers, helping to establish common ground for agreement. Likewise, for investors, understanding a company's value is vital for evaluating potential investments and managing risk.
