Determination of businesses’ market value
Determination of the market value of a business is a process to estimate the market value of a business to be sold. Here all assets and activities of that business are reviewed, so that a financial review is conducted on it. Thus a sales price can be quoted to a potential buyer of the business. Determination of the market value of a business is a process needed not only when it is put for sale, but also when a new shareholder joins or an existing shareholder quits. Furthermore, performance of a company may be reviewed for the purpose of using its share certificates as a guarantee to borrow a loan or to have information about its financial statements.
There are several methods to determine the market value of a business. Some of them are explained below:
1-Net assets
2-Discounted cash flows
3-Market value– book value
4-Forced sale value
5-Reconstruction value
6-Operating enterprise value
7-Illustrative value
8-Market multipliers, multiplier analysis
9-Depreciated replacement value
10-Dividend yield
11-Price– earning ratio
12-Price / cash flow
13-Book value
14-Securities pricing model
15-Arbitrage pricing model.
The methods described above are just examples, for instance the net asset method is employed by calculating the actual market values of the business’s assets and liabilities shown in its balance sheets. The assets and liabilities of the business are found, and their current market values are calculated.
Another major method is the discounted cash flows method. Here the incomes to be made by the business in the future are discounted to their current values. This method is based on the business’s purpose of making a profit. Therefore the profits it will make in the future are important.
The Forced sale value method is for calculating the value of a business if it has ceased business.
The market multipliers method a.k.a. multiplier analysis method reviews mergers and takeovers of similar businesses to make a kind of comparison.
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