Business valuation is a great tool to assess a company’s worth for various reasons. But it is worth it only if done right. Many business veterans have shared their views on this tool from time to time. And all those expert views point to the four core rules of evaluating businesses the right way.
Rule 1
There is no general formula that applies to finding the market value of a business. It varies with the circumstances of the industry and the company in the question. While valuation experts can weigh in all the factors differently, considering elements of reasonableness, informed judgement, and common sense can help land at mutually agreeable conclusions.
Rule 2
There might be cases when the business being evaluated is held closely. In other words, there might not be many resources available to consider and quote for value comparison. In such cases, valuation experts should consider all the financial details including factors that affect the market for appraising a business.
Rule 3
When considering the basic factors like dividends and earnings, using a capitalization rate for average results is necessary. However, there are no fixed criteria for defining a capitalization rate for a business. While it can vary drastically for businesses belonging to the same industry and market, considering the nature, risks, and earning stability of a business can help.
Rule 4
With no prescribed formula for evaluating all businesses, mathematical weights can’t be assigned to certain factors to find fair market values. Here, understanding and applying the unique characteristics of a business helps create business valuations closer to the actuals than those ignoring the unique factors.