Business valuation – how to determine a company’s value step by step

Determining the value of a company is a complex process that requires both financial analysis and consideration of the company’s development prospects. Many business owners, especially of larger companies, have some idea of the value of their business. Often, however, this is emotionally driven, which limits its objectivity. A reliable valuation should take into account the company’s achievements, its future potential, and the context in which the valuation is to be made.

When is a business valuation needed?

A business valuation may be required in many situations:

• when selling the company,
• during investor or financing rounds,
• in the process of restructuring or liquidation,
• in matters of succession and shareholder disputes,
• as security for a loan transaction.

In each case, the methods used and the assumptions adopted can differ significantly. That is why it is so important to approach the process with full awareness and to use proven valuation methods.

Stages of the valuation process – a practical sequence of actions

1. Defining the purpose and subject of the valuation

The basis of every valuation is a clear definition of its purpose. This might be the sale of shares, obtaining financing, succession planning or securing a loan transaction. The purpose determines the choice of the value standard, which may be, for example, investment value, fair value or equitable value. At this stage it is also established what the valuation concerns: the entire enterprise, an organised part of the business or a block of shares.

2. Gathering data

Next, financial, organisational and market information is collected. The analysis covers, among other things, financial statements, capital and asset structure, legal position, competitor data and the terms of prior transactions. Independent specialists, such as property appraisers, are often required to credibly determine the value of certain assets.

3.   Choosing the approach and method

Three main approaches are used in the valuation process: income, asset and comparative approaches. The final choice of method is determined by the company’s characteristics, the data available and the purpose of the valuation.

4. Calculations and analysis of result

At this stage calculations are prepared and then adjusted to reflect the specifics of the company or the transaction context. It is crucial to compare results derived from different methods, as any discrepancies may indicate the need for verification.

5. Valuation report

The outcome of the entire process is a report that presents the assumptions, methods and the final valuation result. This document forms the basis for further discussions, negotiations and decisions.

Main valuation methods – what, when and why?

In the valuation process three approaches are typically used: income, asset and comparative approaches. Each has its advantages and limitations, so the choice of the appropriate method depends on the valuation’s purpose, the company’s specifics and the data available.

1. Income method

The income approach assumes that the company’s value corresponds to its ability to generate positive cash flows in the future. By selling the business an owner actually transfers to the buyer the potential to realise profits in subsequent years. The company’s value is therefore calculated as the sum of future benefits, discounted to present value.

This method best reflects the business’s growth potential and shows the level of profit that can be expected. Its drawback, however, is the need to adopt many assumptions about the future, which increases the risk of error. Buyers often treat forecasts cautiously, which can lead to negotiations and a reduction of the valuation result.

2. Comparative method

The comparative valuation relies on analysing the value of other companies with a similar business profile. It assumes that if a comparable company was sold for a given price, the company being valued should have a similar value.

Comparisons use data from listed companies or capital transactions, as well as financial multiples (P/S ratio, EV/EBITDA). The advantage of this method is the ability to quickly establish a market value based on actual transactions and stock market data. A limitation may be the lack of sufficient data, particularly on the Polish market.

3. Asset method

The asset approach in its basic variant comes down to determining the net asset value, i.e. the difference between the company’s assets and liabilities. This is the simplest method, as it is based on the balance sheet and book values. Its strength is objectivity, yet this approach often understates the real value of the company.

This is because it does not account for intangible components such as brand, customer base or know-how, which are important to investors. For this reason it is most often applied as adjusted net assets — that is, after bringing asset values to market levels.

Asset methods are particularly useful when a company ceases operations, is in financial distress, or when its main strength is tangible assets, e.g. real estate.

Which method to choose?

Unfortunately, there is no single universal valuation method. Depending on the purpose, industry and the company’s situation, results obtained from different approaches may vary significantly. In practice, mixed methods are often used to obtain a more balanced picture of a company’s value.

Summary

Business valuation is a process that requires knowledge, experience and understanding of both financial and non-financial factors. Properly conducted, it assists in shareholder disputes, discussions with investors or the sale of a company.

Regardless of the method chosen, it is crucial to define the valuation’s purpose correctly, collect complete data and objectively analyse the results. Only then can a valuation provide real support for strategic business decisions.

If you are considering the value of your company or preparing for talks with investors, it is worth seeking the assistance of specialists who will help carry out the entire process reliably and professionally.
At MDDP we offer comprehensive business valuations tailored to each client’s needs. We work in accordance with current standards and proven methods — with care for the reliability and transparency of every stage of cooperation.

Need a professional valuation? Contact our team of experts and find out how we can support your project! >> https://www.mddp.pl/valuations-and-financial-modelling/