02 Mar 2020 Ankit Chadha

Company Valuation: There's more to it than just numbers

Company Valuation | TRC Consulting

Every company faces the necessity to realize the actual value of their assets. The assets can be physical properties like plants and office buildings, intellectual properties, relationships with consumers or suppliers, or technology. Under regulatory compliance, both private and public entities need to measure their reported goodwill equally and recognize intangible assets. 

What is company valuation, you may ask? Well, it attributes to the real value of an asset, be it a commodity, stocks or securities – which is agreed upon by both the seller and the purchaser. Company valuation is applied to any products sold or traded in the market. Determining company valuation is necessary to arrive at a sum or value that quantifies your company's actual worth.  

When it comes to company valuation, most think that it is just about crunching numbers. That is not true. Every business owner should obtain an annual company valuation that can be referred to as not only measure the company's growth but also plan for future growth and prospects. Let us understand how company valuation has more to it than just numbers. 

Not All Market Data Are Created Equal 

Most companies solely rely on what their competitors obtained for their businesses or similar industry data to establish a price. One set of market data that companies regularly use as 'rule of thumb.' This rule of thumb is a broad guide or principle that is used to get a rough estimate of the actual value of a company. Some rules look at a particular market and determine an average based on which companies sell in that industry.  

Using this rule of thumb can have disadvantages. For example, If the average value of a burger joint is 25% of gross revenues, why should the value of your burger joint be the same, when you deliver hot burgers, that combines a huge selection of gourmet recipes. While the burger joint that is just down your street, has recently been cited by the health department due to unsanitary conditions, would also be worth 25% of gross revenues, if we follow the standard rule of thumb.  

An Example For Better Understanding 

Contrary to the companies using the 'rule of thumb' method, company valuation firms maintain their database of market transactions and utilize explicitly detailed information on business sales. Deriving these data is comparatively easier than using them. As an appraiser, using the derived data maps the transactional universe and then positions the subjected company inside that transactional universe. 

The company valuation appraiser uses developed data to research further for formulating unique competitive differentiators like advanced technology, resilient capital models and then compares these differentiators to the subjected company. If the differentiators exist in a particular market, then the appraiser positions the subjected company into the very same market. After this, the appraiser definitively applies different ratios of the market to the adjusted earnings of the company to generate the actual value of your business. 

The Magic Number 

Company valuation appraisers weigh the results of multiple valuation methods to extract the magic number for a corporation, which helps explain the considerations and the fees for assessing the company's value. The complexities of company valuation procedures demand the guidance of an expert. 

As an appraiser, one should never rely on just one method to determine a price or value. Using different techniques for establishing the final figures of company valuation proves to be beneficial. Predominantly, the three different company valuation methods that offer different perspectives to companies are: 

  • Asset-Based Approach 

  • Market-Based Approach 

  • Earning Yield Approach 

After a thorough consideration of all the three above mentioned approaches, appraisers select one or more methods that they consider relevant. Later, based on the final assessment of the company value, appraisers correlate the market value indicators to the derivative value of the company. Company valuation is a subjective assessment, in which one approach can outweigh the other, based on the company's business model.  

Select An Expert Valuation Partner 

Whether you intend to sell your business or formulate a growth plan, the best thing you can do is to get an expert assessment of your company annually. At TRC Corporate Consulting, we help you realize your company's actual worth. Our company valuation professionals also help you identify the non-competes of your business to mitigate risks. You can expect reports explaining the full economic cycles of your business and ways to improve them. 

When you avail our company valuation consulting services, we don't consider you to be just our client, we think of you as our partner. Fulfilling your company's business requirements is our priority. If you need a better understanding of our services or have any queries, contact us! 

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