WHAT BUSINESS VALUATION IS USED FOR

The determination and/or estimation of the financial worth of a firm or company is known as

business (company) valuation (Ward, 2021). In order to arrive at assumptions for future earnings,

discount rates, and growth rates, the valuation process examines every facet of an organization,

including the market value of its assets, management, and capital structure (Ward, 2021). (Peek,

2020). Different valuation processes and/or procedures can be used, each of which can produce

quite different results, depending on the aim of the assessment, the state of the firm being

appraised, and who is carrying out the appraisal.

For a number of reasons, such as selling the business, mergers and acquisitions, the formation of

business partnerships, taxation and tax reporting, retirement planning, settlements for legal

damages, divorce proceedings, etc., business valuation can be used to determine the fair value of

a business (Hayes, 2021). When planning for a merger, creating a partnership, locating creditors

and shareholders, selling a firm, conducting a complete tax study, or attempting to understand

where one's business stands in the industry it operates in, business owners should consider

valuation (Peek, 2020). An in-depth examination of a business valuation can assist owners in

comprehending the factors that influence development and profitability (Ward, 2021).

Investors use valuations to establish the value of the company they are buying or investing in

(Ward, 2021). It can also assist them in defining their investment philosophies and strategies.

One indicator that creditors and lenders use to assess the financial standing of the company they

wish to fund is valuation. The importance of valuation in tax reporting (Hayes, 2021).
The discounted earnings method of valuing a business

Ward (2021) contends that the discounted earnings/cash-flows method provides a more accurate

estimate of a business's value than other methods because it takes into account the current value

of a company's anticipated future profit earnings. The discounted earnings/cash-flows approach

is used to calculate the present value of a company's future earnings/cash-flows. This method is

based on the idea that a company's total worth is equal to the sum of its anticipated future profits

and terminal value (NACVA, 1995). This method of valuation is typically applied to strong,

profitable organizations because it assesses enterprises on their potential to generate wealth in

the future (Peek, 2020). The approach also accounts for the time worth of money and the dangers

of business investment.

References:

Hayes, A. (2021, April 25). Understanding Business Valuations. Investopedia.

https://www.investopedia.com/terms/b/business-valuation.asp.

NACVA (1995). Fundamentals, Techniques & Theory COMMONLY USED METHODS OF

VALUATION. http://edu.nacva.com/preread/2012BVTC/2012v1_FTT_Chapter_Six.pdf.

Peek S. (2020, November 2). How to Do a Business Valuation.

Https://Www.uschamber.com/Co. https://www.uschamber.com/co/run/finance/business-

valuation-how-to-guide/amp.
Ward, S. (2021, June 21). 3 business valuation methods: How to evaluate a company. balance.

https://www.thebalance.com/business-valuation-methods-2948478.