Company valuation, can you value your own company yourself?

People who run their own businesses are often faced with the dilemma of how much their company is actually worth. Such a valuation is necessary for many business transactions. The most important of these are the sale of shares, attracting investors, applying for a loan or selling the company.

Valuation is simply the determination of the total value of a company using selected methods and relevant information and financial data. When estimating the value, factors such as legal form, type, scope and subject of business activity should be taken into account.

Advantages and disadvantages of company valuation:

• Objectivity – a company valuation is based on the book values of the assets and liabilities of a company.
• Simplicity – a company valuation can be carried out independently using the data from the balance sheet.
• incompleteness – a valuation made using this method usually underestimates the value of the company because it does not take into account components that are not included in the balance sheet
• it usually does not represent the market value of the company but only its book value.

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Classic valuation methods

There are various methods of valuing a company, one of the most significant methods is the so-called income method, which regards the company as a tool for generating income. It is about positive cash flows. The value of these flows in each year is defined as the amount that the owners of the company can pay out in the form of dividends or other forms of profit sharing in a given year of operation. This method is considered to best reflect the value of the company, showing how much profit it can realistically generate in the future. This is crucial when negotiating the sale with a potential investor.

Another method is the “comparison” method. The company being valued is compared with other companies in the industry with similar business profiles. The principle is that if a similar company has been valued at a certain amount, the market value of the company being valued should be similar. Companies with public financial data such as listed companies and companies that have been acquired and whose acquisition terms are public are used here. This method has many advantages, e.g. if the appraiser has a sufficiently large database of information on capital transactions from recent years, the valuation of the company is quick and efficient.

In addition, the valuation allows the market value of the company to be determined based on transactions that have actually taken place.

It is difficult to determine the effectiveness of each method and which one is the best. Each one uses different information and gives different results. It is often a good solution to use mixed methods, using a weighted average to obtain results from different methods.

We come across company valuations more and more often. We look for investors when selling a company, and often also during negotiations or in the course of a shareholder dispute to establish good conditions and a settlement. Sometimes, company management or shareholders also carry out a valuation periodically to determine (check) the value of the capital involved.

Can anyone value a company?

So who should carry out this valuation? This job is often assigned to accountants. But is it really that simple? Don't they need to understand at least a little about the specifics of a given industry, the company's business model, the strategy pursued, and the company's key resources and how they are used? The regulations do not stipulate that the valuation of companies is the exclusive competence of a specific professional group, e.g. property appraisers or auditors. In practice, a company valuation can therefore be prepared by any person who we are convinced has the appropriate qualifications and experience.

In practice, it turns out that while it is quite easy to deal with the technical calculation of relevant financial indicators, it is much more difficult to draw conclusions about the overall condition of the company, its strengths and weaknesses. The use of competitive (sectoral) and macroeconomic environment analysis also causes significant difficulties. Often, they are not carried out at all, even though they are of great importance for identifying and assessing opportunities and threats in the company's environment. It can be argued that it requires a fair amount of experience, knowledge and business maturity to draw the right conclusions.

Let's also remember that buying and selling transactions are based on the principle - A business is ultimately worth as much as someone decides to pay for it. That's true, but it's worth being aware that a given company has potential and is therefore of high value. Remember that when buying a business in the form of an organized enterprise, we must look at it as a tool for generating income, as discussed in the income method. We pay a value not only for real estate, machinery or products, but also for the owner's experience, the company's market position and contacts with customers.

Author: M. Knast

Photo: https://unsplash.com/photos/M98NRBuzbpc