What Is a Business Valuation?

What Is a Business Valuation? was originally published on Forage.

business women valuing company using business valuation

A business valuation is a way to determine how much a company is worth. Determining the value of a business is important in many contexts, such as for tax purposes or selling a company. 

In this guide, we’ll go over:

What Is Business Valuation Used For?

Knowing how much a business is worth can be useful in a variety of scenarios. For example, the Internal Revenue Service (IRS) may use business valuation methods to determine taxes on a company. Small business owners can also use business valuation methods to figure out how much they can sell their business for. 

The most common place to find business valuation is the finance industry, though. Certain careers in finance rely on business valuation to inform investing decisions. Investment bankers, for example, use a variety of business valuation methods to figure out how much a company is worth for a merger or acquisition. Business valuation can also help determine if a company is worth investing in. 

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How to Calculate a Business Valuation: 5 Methods

There are many ways to determine the value of a business, and each has its limitations. Some of the most common methods used by finance professionals include: 

Discounted Cash Flow (DCF) Valuation

The discounted cash flow method of valuing a business involves looking at how well a company can generate future returns for investors. 

Learn how to do a DCF valuation

Comparable Company Analysis

Valuing a business using comparable company analysis involves looking at companies of similar size in similar industries and comparing specific metrics, such as revenue and EBITDA (earnings before interest, taxes, depreciation, and amortization). This comparison helps determine how much a company is worth in comparison to its peers. Additionally, a comparable analysis can be done to see how much similar companies were recently sold for to determine the value of a business. Comparable company analysis is a core method of valuation for mergers and acquisitions. 

Learn more about comparable company analysis

Liquidation Value

The liquidation value of a company is how much money would be left over if the company sold off all assets and paid off all liabilities (or debts). 

Book Value

The book value of a company is determined by looking at the total assets of the company, minus all liabilities. The book value is similar to the liquidation value. However, an asset’s stated value on a financial statement may be different from how much it’s worth in cash. Certain assets, such as real estate, may have a different inherent or future value than if they were sold for cash today. 

Market Capitalization

A company’s market capitalization is found by multiplying the total number of shares by the current share price. This can only be done for publicly traded companies, but it essentially determines how much the company is worth based on shareholder equity. 

>>MORE: Learn how to value a business (and more!) with Forage’s Investment Banking Skills Passport.

How to Show Business Valuation Skills on Your Resume

Some methods of business valuation utilize financial modeling skills. For example, a DCF valuation requires building a financial model. So, one way to express your skills in business valuation can be through listing financial modeling in your skills section or as part of a previous internship or work experience. 

You can also simply mention business valuation skills on your resume, and call out specific methods you know how to do, such as comparable company analysis or DCF valuation. 

If you have had extensive experience with various valuation methods, that can be a great thing to discuss in your cover letter where you have the extra space to show off your knowledge. 

>>MORE: Find other ways to show off your hard skills

Related Financial Skills

Business valuation is a core skill for many finance professions, such as private equity and investment banking. Other skills these types of careers require include: 

Think finance is the right career path for you? Learn the skills you need with Forage’s finance virtual experience programs

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The post What Is a Business Valuation? appeared first on Forage.