This value can be cost, book value or market, fair value. Knowing the value of your property and what determines it is a prerequisite for asset management. It usually provides insight into new opportunities for business decisions on:
- Potential business expansion
- Entering new projects or new activities
- Creating partnerships
- Detecting potential market synergies
- Sale/purchase of a company or its share
- Selling / buying part of a business
Company valuation is often to as a discipline to scientific-professional circles. In the valuation itself, it is essential to note that the appraised value is not an exact quantity but a range of values of a particular company.
The assessment of the company’s future business assumptions and the assumptions based on which the planned future can deviate significantly from the achieved results. That is why it is necessary to conduct a sensitivity analysis that leads to a particular company’s value range.
The methods of determining the value of a company can be in three main groups:
- Dynamic method: Discounted cash flow method (DCF)
- Relative method: Multiplier methods
- Static method
No assessment method is considered optimal, i.e., each technique certain advantages and disadvantages. For example, the main advantages of the DCF method are the ability to develop quality cash flows of the company and its parts. It respects the business’s long-term potential and on a going-concern concept that assumes its endless business. On the other hand, the DCF method is challenging to apply when cash flows are highly damaging, as this calls into question the going-concern value concept.
Also, the parameters used in the model are highly subjective in nature. First of all, this assesses the discount rate and revenue growth rates, which are applied to cash flows and ultimately in the calculation of residual value.
Company valuation is a very complex science in which the appraiser needs to be impartial, aware of the uncertainties, and know how to put the valuation process into simple frames.