Business Valuation 3

Valuation is what a business is worth, as in “this company’s valuation is $10 million.” This would mean that a company is valued at $10 million, or worth $10 million. The term is used most often for discussions of sale or purchase of a company; it’s valuation is the price of a share times the number of shares outstanding, and the price of a share is the total valuation divided by the number of shares outstanding.

Some of the different valuation methods consider:

  1. Rate of return
  2. Timing and form of return
  3. Amount of control desired
  4. Acceptable level of risk
  5. Perception of risk

Standard new venture valuation methods may include:

  1. Asset-based valuation: the business is worth the sum of its assets. Not a popular valuation method for new businesses, because their future should be worth a lot more than their assets.
  2. Book value: the book value of a company is the calculation of assets less liabilities.
  3. Adjusted book value: this variation adjusts the assets – liabilities calculation for real value of assets, distinguished from the accounting value.
  4. Liquidation value: what a business would yield in real money if its assets were liquidated.
  5. Replacement value: what it would cost to replace the business if the replacement started from scratch.
  6. Earnings Based Valuations: this is by far the most popular method for new businesses; they are valued based on future earnings.

Valuation is also important for tax reporting. Some tax-related events such as sale, purchase or gifting of shares of a company will be taxed depending on valuation.

The term is used less in discussions of major publicly traded companies, but it is essentially the same as market cap or market capitalization.

Used as a verb, valuation is the process of determining what the business’ valuation. In this context, a valuation is like an audit, and a valuation expert is a CPA or analyst who does valuations. Some CPAs are certified as valuation experts, which means the IRS is more likely to accept their valuation as part of a transaction related to taxes.


About the Author Tim Berry is the founder and chairman of Palo Alto Software and Follow him on Twitter @Timberry. Follow Tim on Google+ Read more »

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  • Harry Hvostov

    Asset and market-based business valuation methods are rarely used in valuing young start-ups. Reasons:

    1. A start-up has an assemblage of assets with little track record of producing earnings.

    2. Most businesses sale comparatives are for established businesses. There bear little resemblance to a start-up.

    The most common methods are income-based. Most notably, the Discounted Cash Flow method is used, using the best/worst/most likely case financial forecasts.

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  • Bob Macek

    Informative articles and should be of help to anyone thinking of going into business.

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  • Business Valuation Advisors

    Business valuation is very important to know what is your business worth while. Business valuation is Important in selling or buying business, tax purpose, gifting share or company, and in divorce case. There are many methods to measure or determine your business value, and choose the best method according to your business. It is not that much easy to valuation of your business it vary case to case. It is good to hire some professional to value your business as they better know about different factors while valuaing a business.