How do you go about getting the true and fair market value of a business? Whether you’re buying or selling (or investing, insuring or advising!), valuing a company can be a complex and lengthy process, so here’s a more detailed explanation of how it all works.
When it comes to valuing a business, there are several methodologies you could use. Each methodology is different, with distinct advantages and disadvantages that may make them more suited to certain scenarios.
2019 is an interesting time in the world’s economy. Why? Well, the wealthiest generation in American history needs to pass down its riches (around $68 trillion to be precise*) – which is rather a lot of money to move around. Many Baby Boomers (those born between 1946 and 1964) are reaching either the end of their working careers – or the end of their lives. For this reason, an estimated 70 million people in the US alone** are needing to sell their businesses and bequeath their assets to their Gen X and Millennial heirs.
You may recall from our valuation methodology or time value of money blog posts that our primary valuation technique – the Discounted Cash Flow (DCF) method – relies on a Discount Rate. Although there are good reasons to use (or at least test!) other rates, the appropriate Discount Rate to use for a DCF is often the company’s weighted average cost of capital or “WACC”.
Valuing young companies is a difficult task. Because a new company is early on in its lifecycle, it can be hard to project what it will be worth in future – especially when it has no established products or services yet. So, how do you go about valuing it accurately?
When it comes to valuing a company, it’s crucial to understand the difference between equity value and enterprise value. At their simplest, the two concepts can be defined as follows: