Business valuation

Business valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to consummate a sale of a business. In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establish a formula for estimating the value of partners' ownership interest for buy-sell agreements, and many other business and legal purposes.

Business valuation in practice use different methods, respectively models. Highly important and busy group consists of income method- DCF (discounted cash flows) method. Business value is derived from the present value of future profits associated with ownership of the company. The principle of these models is find the time value of future returns which the investor receives for the investment. In DCF models can work with various forms of future earnings, cash flow, discounted cash flow, dividend etc. Investors from developed economies are currently the most used model EVA - Economic Value Added and the method of discounted free cash flow.

Basic information input in determining the value of the company:

• internal business information

• sectored information and projections (as a development competition)

• macro-economic information (state and country's economic development, legislative support)

 

The discounted free cash flow

The method of discounted cash flow yield is the basic method used for the valuation of the company. The principle of this method is that the current value of the company is derived from the present value of future cash flows generated by the company. One of the most important things in determining the value of a company using DCF is the determination of cash flows, that is, determining what we discounted. Construction of cash flows depends on the nature of the result to trying to achieve. There is the bottom most popular types of results:

• valuation of equity

• corporate valuation overall.

The calculation of the value of the company is then in various different types of construction as cash flows, as well as the discount rate. These two types of calculations are referred to as DCF equity and DCF entity. DCF equity determines the value of equity capital; DCF entity determines the overall value of the company.

 

Method of Economic Value Added -EVA

The ideological basis based on the target company to make a profit. However,  a distinction between profit, which shows the accounts and economic gains. Economic profit in this concept is achieved when they are paid not only current expenses but also capital costs incurred to creditors (interest expense) as well as owners, shareholders (the cost of embedded capital.

Calculation indicator EVA (Economic Value Added) is based on adjusted profit after tax NOPATt (net operating profit after taxes) and the weighted average cost of capital business

EVA = NOPATt - Ct. WACC

WACC - weighted-average cost of capital expense associated with capital structure

Ct - long-term capital invested

The construction of the indicator concentrates essential aspects of your business:

• size of the capital involved in the business and its internal structure

• the cost of capital (equity and capital creditors) that is the price you must pay for the use of enterprise resources (WACC)

• efficient use of resources invested.

EVA as an interesting benchmark for assessing the performance of the company, which also can be used to determine the value of the company.

 

 

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