Business Valuation and Its Purpose
Business valuation, according to Finance for Managers (2012), is the process of assessing the economic worth of a firm or business organization. This value is often computed based on the company’s expected future financial performance, as well as the risks involved with attaining that performance. The goal of business valuation is to offer a foundation for investment choices, such as whether to acquire or sell a firm, or to evaluate the worth of a company’s assets in order to raise funds or sell the business (Dauderis, H., Annand, D., & Jensen, T., 2021).
The Market Approach
The Market Approach is one way for valuing a firm that consists of four guidelines: the guideline public company method, similar private transaction method, dividend-paying capacity method, and earlier sales of interest in the subject business (Corporate Finance Institute, 2022).
The guideline public company technique assumes that similar firms will have similar valuations. The stock prices and financial performance of publicly listed firms in the same industry as the subject business are used to calculate its worth (Corporate Finance Institute, 2022).
The comparable private transaction approach is similar to the guideline public company method, but it bases the subject business’s worth on the selling prices of privately owned firms in the same industry (Finance for Manager, 2012).
The dividend-paying capacity technique is based on the notion that the ability of a firm to create cash flows determines its worth. This approach determines the worth of a company based on its dividend-paying capabilities and the needed rate of return for investors (Ward, 2021).
Prior sales of interest in the subject business approach are based on the notion that the price paid by past buyers determines the value of a firm. The worth of the subject business is determined using the sale prices of past transactions involving the subject business (Ward, 2021).
Why I Choose The Market Approach to Valuate a Business?
For various reasons, I prefer the Market Approach technique of valuing a company. First, unlike other techniques, the Market Approach is based on objective facts such as stock prices and financial performance, which can offer a more accurate evaluation of a company’s value. Second, the Market Approach considers the economic realities of the subject business’s industry, which can offer a more accurate estimate of its worth. Finally, because the Market Approach is generally understood and utilized by investors, it is a solid way for estimating a business’s value (Ward, 2021).
Conclusion
Finally, business valuation is a crucial procedure that helps assess the worth of a company’s assets and serves as a foundation for investment decisions. The Market Approach is one way of valuing a firm that uses objective data and considers industry economic circumstances to produce a more accurate and realistic estimate of a company’s value. This approach is generally understood and employed by investors, making it a solid means of determining a business’s value.
References
Corporate Finance Institute. (2022, October 4). Market valuation approach. Retrieved December 13, 2022, from https://corporatefinanceinstitute.com/resources/valuation/market-approach-valuation/
Finance for Managers. (2012). Licensed under Creative Commons by-nc-sa 3.0. Retrieved December 13, 2022, from https://my.uopeople.edu/pluginfile.php/546007/mod_page/content/17
Dauderis, H., Annand, D., & Jensen, T. (2021). Introduction to financial Accounting. Lyryx Learning Inc. Licensed under Creative Commons BY-NC-SA 3.0. Retrieved December 13, 2022, from https://lyryx.com/introduction-financial-accounting/
Note:
This article is written based on University of The People Financial Management (BUS 5111) written assignment by Fristy Tania in December 2022
