Valuing the company

Valuing a business is never an exact sceience with no one right away of determining a company's price.  These are the common ways of appraising a business:

A.  Hard numbers
B.  Soft numbers
C.  Intangible assets
D.  Market competition


A.  HARD NUMBERS
These are based on existing financial figures and include:

1.  EQUITY BOOK VALUE
The simple formula is to subtract a company's liabilities from its assets based on historical records.

2.  ADJUSTED BOOK VALUE
This is the same formula but takes into account the fair market value of assets and liabilities, which may produce a more accurate picture as historical records may be very out-of-date.

3.  LIQUIDATION VALUE
This is another variation on the balance sheet theme that calculates how much money is left when assets are sold quickly and debts are paid off.

4.  FAIR MARKET VALUE
This is simply the value established between a willing buyer and a willing seller.

5.  MARKET VALUE
This applies to a publicly traded company.


B.  SOFT NUMBERS
Soft numbers are based on estimates of future benefits and therefore contain an element of subjectivity.

1.  INCOME METHOD
This is a measurement of the future benefits such as sales, profits, or cost savings.

2.  DISCOUNTED CASH FLOW APPROACH
This approach brings future anticipated income to present value.

3.  INVESTMENT VALUE
This takes into account the special benefits that a buyer accrues from acquiring the new entity.


C.  INTANGIBLE ASSETS
Increasingly, prospective buyers are putting a greater onus on a company's intangible assets, which include people, knowledge, relationships, intellectual property, brand names, loyal customer base, copyrights or trademarks, proprietary mailing lists, long-term contracts, and franchises.

Some intangible assets can be priced using traditional approaches such as:

1.  COST-BASED VALUATION
How much would it cost you to duplicate some of these assets today?

2.  MARKET-BASED VALUATION
What were the sale transactions of brand-named goods in the sector?

3.  CUSTOMER-DRIVEN VALUATION
What is the value of a loyal customer?  What does the average customer spend per purchase a year?  How long has he been a customer?


D.  MARKET COMPETITION
Research into the company and its place in its sector are also relevant.  Is your business in a growth industry or a declining one?