A company’s business valuation is performed by professionals and requires great skill and comprehensive experience in performing evaluations for companies in various fields. There are several accepted models used for these evaluations. For the most part, there is a correlation between the nature of the field and its activity and the model by which the company is priced. Determining the proper model for valuating a business requires great skill and proficiency.
The following are several accepted methods used for performing a fair business valuation for a company:
Operating Income Multiplier
This method, used to determine a company’s value, is based on multiplying a company’s economic profit by a predetermined multiplier. The multiplier is determined based on the field of activity in which the business mainly operates as well as the company’s performance compared with the benchmarking average. Determining the operating income for calculation is done according to the majority of profits from recent periods or a forecast of future profits. This method is widely accepted and easy to calculate. The downside to this method is that it may sometimes disregard significant data which is hard to gross using this multiplying method.
Discounted Cash Flow (DCF)
A well-known, common method, based, in part, on a company’s future performance.
In this method, the following components are calculated:
1. Evaluating the future profit in a specific manner – a product of projected profit/loss reports from the next few years.
2. Discount period – a strong, stable company will bring to longer discount periods.
3. Determining the discount interest rate – usually influenced by the level of risk involved in a company’s activity.
Book Value
This method is based on a valuation of a company’s total assets. Calculating this value is performed based on the difference between the total amount of assets and the total amount of obligations the company has at a certain time. This method may sometimes lead to finding that a company’s value is negative. Furthermore, this method is accepted in businesses in which closing a company or ceasing activity is an unreasonable scenario. The deflection that may occur in the analysis based on this method is disregarding the value of the business activity and company performance.
Earnings Capitalization
This method is based on valuating the discount rate of the profits in percents. Based on this analysis it is possible to see the company’s profitability in respect to its sales and assets. This data is not necessarily positive and indicates the company’s profitability in terms of its business activity and an analysis of its main profits.
Sales Growth Rate – Capitalization of Current Earnings
This method is based on an evaluation of the company’s sales growth and establishing a business valuation based on this growth. This method is relevant for companies reflecting consistent growth in their income. Today there are many fields that present growth and development at a fixed rate. This item of data must be taken into account when performing the business valuation in order to estimate the company’s value in the most accurate way.
Weighted Assessment
The Institution of Business Analysis in Israel uses an advanced technological tool, developed by the company, with which we are able to perform a weighted assessment of all above-mentioned methods in order to receive the most accurate business valuation.
