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There are many reasons why a business owner or individual may need to know the value of a business, The typical standard of value utilized is fair market value. The fair market value standard consists of an independent buyer and seller having the requisite knowledge and facts, not under any undue influence or stressors and having access to all of the information to make an informed decision.
The common reasons are following:
  • + To evaluate an offer and negotiate a strategic sale of a business.
  • + To evaluate an offer and negotiate a strategic sale of a business.
  • + For exit strategy planning purposes.
  • + For structure of shareholders
  • + Issue stock to employees
  • + For buy-sell purposes and funding the agreement.
  • + To obtain bank financing or alternative investment.
  • + For bancrupcy purpose
  • + For determine the strategy of profit improvement

The capital of any business is born from 2 types that Owned capital can be in the form of equity and whereas borrowed capital refers as debt.

Asset have also two types that tangible asset and intangible asset.

Tangible asset that takes on a physical form, such as land, buildings, machinery and inventory, Intangible asset that is a non-physical asset, like goodwill, brand recognition and intellectual property (copyrights, patents, trademarks and such).

Buyer/Investor have 2 option consideration of purchase, they purchase equity or asset.

Advantage of Asset purchase
  • A major tax advantage is that the buyer can “step up” the basis of many assets over their current tax values and obtain ordinary tax deductions for depreciation and/or amortization.
  • WIth an asset transaction, goodwill, which is the amount paid for a company over and above the value of its tangible assets, can be amortized on a straight-line basis over 15 years for tax purposes. In a stock deal, with the acquirer buying shares of the Target, the goodwill cannot be deducted until the stock is later sold by the buyer.
  • The buyer can dictate what, if any, liabilities it is going to assume in the transaction. This limits the buyer’s exposure to liabilities that are either unknown or not stated by the seller. The buyer can also dictate which assets it is not going to purchase. If, for example, the buyer determines that the seller has a lot of accounts receivable that are probably uncollectable, then they can simply elect not to purchase the Target’s AR (accounts receivable).
  • Because the exposure to unknown liabilities is limited, the buyer typically needs to expend less time and money, and fewer resources, on conducting due diligence.
  • Minority shareholders who don’t want to sell their shares can, effectively, be forced to accept the terms of an asset sale. Unlike the case with a stock purchase, minority shareholders do not ordinarily have to be taken into account in regard to an asset purchase.
  • The buyer can select which employees they want to retain (and which they do not) without impacting their unemployment rates.
The Disavantage of asset purchas
  • Contracts – especially with customers and suppliers – may need to be renegotiated and/or renovated by the new owner
  • The tax cost to the seller is typically higher, so the seller may insist on receiving a higher purchase price.
  • Assignable contract rights may be limited.
  • Assets may need to be retitled.
  • Employment agreements with key employees may need to be renegotiated.
  • The seller still needs to liquidate any assets not purchased, pay any liabilities that have not been assumed, and take care of any leases that need to be terminated.
Advantages of a Stock Purchase
  • The acquirer doesn’t have to bother with costly re-valuations and retitles of individual assets.
  • Buyers can typically assume non-assignable licenses and permits without having to obtain specific consent.
  • Buyers may also be able to avoid paying transfer taxes.
  • More simple and commonly used than an asset acquisition. Hedge funds are known for commonly conducting M&A transactions in the form of a simple stock purchase.
Disadvantages of a Stock Purchase
  • The main disadvantage is that an acquirer receives neither the “step-up” tax benefit nor the advantage of handpicking assets and liabilities.
  • All assets and liabilities transfer at carrying value.
  • The only way to get rid of unwanted liabilities is to create separate agreements wherein the Target buys them back.
  • Applicable securities laws, of course, have to be dealt with, and this can complicate the process, especially when the Target has a lot of shareholders. Additionally, some shareholders may not wish to sell their stocks, and this can drag out the process and increase the cost of acquisition.
  • Goodwill is not tax deductible when it exists in the form of a share price premium.

+ Discounted cashflow:

Reported to be Warren Buffet’s preferred business valuation technique, discounted cash flow is applied to mature businesses that are heavily invested and predict stable cash flow over several years to come – an established energy company with a local monopoly would fit the bill, for example.

The discounted cash flow method estimates what a future stream of cash flow is worth today. The valuation is the sum of the dividends forecast for each of the next 15 or so years plus a residual value at the end of the period.

Today’s value of each future dividend is calculated by applying a discount interest rate (typically, anything from 15% to 25%), which takes into consideration the risk and the time value of money (based on the idea that £1 received today is worth more than the same amount received tomorrow). If the estimated value is higher than the current cost of investment, the likelihood is that the investment opportunity is one worth keeping an eye on.

+ Coparables:

A popular method of valuing a business is to consider the value of comparable companies that have sold in recent times or whose value is already in the public domain.

What works for calculating average house prices can work for valuing businesses, too.

You need to ask consultant who handle similar industry M&A deal, who give advise on price of company. Consultant maybe is bank, If you have a good stockbroker, he or she may be able to help you research typical sales multiples for your industry. A good business broker can also help you if he or she has done valuations in the industry you're investigating.

The other valuation approaches all think of a business as a stream of cash. They value a business by trying to come up with a value for that stream of cash. How to use cash, that cash can be used for growth or dividends to you, the shareholder. Estimate the earnings for the next few years and ask how much that income stream is worth to you.

In order to measure startup company, investor/buyer pay effort to find out the potential of market, calculate profit in 4-5 years, it refers to accelerator program providing from angel fund or individua investor.