There are several ways to value a business, and each method offers a different lens depending on what you're trying to assess—like assets, earnings, or market potential. Here are some of the most commonly used methods:
1. Book Value – This is the simplest method. It calculates the value based on the company’s balance sheet: total assets minus total liabilities. It’s straightforward but doesn’t always reflect market realities.
2. Discounted Cash Flow (DCF) – This method estimates the present value of future cash flows, adjusted for risk and time. It’s great for businesses with predictable earnings and long-term growth potential.
3. Market Capitalization – Mostly used for publicly traded companies, this is calculated by multiplying the company’s share price by its total number of outstanding shares.
4. Earnings Multiplier – This method applies a multiplier to the company’s earnings (like EBITDA) based on industry standards. It’s useful for comparing similar businesses.
5. Enterprise Value (EV) – This takes into account market cap, debt, and cash. It’s often used in mergers and acquisitions to assess the total cost of buying a business.
6. Growing Perpetuity Formula – This is a more advanced version of DCF, used when a company is expected to grow at a constant rate indefinitely.
Each method has its strengths and is better suited to different scenarios.
