Business valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to affect a sale of a business.
There are four main reasons for valuing a business
- To help you buy or sell a business – it improves the business’ real or perceived value, choose a good time to buy or sell, negotiate a better price as a buyer or seller, complete a purchase more quickly
- To raise equity capital – a valuation can help you agree a price for the new shares being issued
- To create an internal market for shares – a valuation can help you to buy and sell shares in a business at a fair price
- To motivate management – it provides a measurement and incentive for management performance and focus management on important issues.
There are many different techniques for calculating the value of a business, such as industry specific formulas, asset based valuations, discount cash flow forecasts and dividend formulas.