The accurate fiscal value or the size of the business economic value is referred to as a business assessment. This process is important for various financial needs. This determines how much potential financing will invest in a particular business and the amount of return can be expected.
Business per se or its strategic unit may be appreciated because one of the following reasons:
• Before mergers or acquisitions
• To complete concern related to plantations or taxation gifts
• To estimate business net worth before sales
• To assess your business before approaching shareholders or potential investors
Business assessment component
Realistic assessment of a business involves more than analyzing the previous year’s financial statements.
• Requires a comprehensive analysis of various years of business performance.
• Prospective company position in the market against competitors.
• It also considers the future of the industry based on economic predictions.
Business Assessment – Approach
There is no special method used for business assessment. There are various methods used, which use various sources of financial information and various assumptions to calculate certain business values. For example, this method can be based on the evaluation of assets owned by the company, inflows and cash flow for businesses, or projected company revenues.
Let’s discuss some methods that are widely adopted for business assessment.
The following method is based on income and cash flow:
1. Discount or future cash flow method
This approach is most preferred by prospective corporate investors because of its accuracy and effectiveness. This is called the future cash flow method because it takes into account the upper and destroyed financial projections over a certain period and the money expected to flow to the company. This will give fair ideas to investors about the expected ROI and the time they have to wait to accept the same thing.
2. Relationary valuation method
This method has the current investment weight to the monetary inflow in the future. It uses financial figures in previous years to speculate revenue in the future, assuming that no change will occur. The conclusion of this method is based on the principle that the higher the amount of potential cash flow, the greater is the current business value.
The following method is based on the assets owned by the company:
1. Book value method
This method is the simplest, where business assessment can be calculated from the company’s financial statements. This requires only reducing the company’s obligations from their assets. The value obtained is a net business of business, also called the value of the book or the equity of shareholders.
2. Liquidation value method
This method first sets a depressed level for company assets and reduces the value of the actual obligations of the resulting number. Liquidation values reflect business values that are far lower than the current market level. This is generally used only if a business is in serious economic problems.