Put, a valuation is a statement of the worth of something. In the context of stocks and shares, it can be used to describe the price at which they would be bought or sold or their value as determined by an expert like Vanguard Valuations. These provide references for comparing a business’s performance with comparable businesses in similar lines of business.
What does it entail?
Once a business has been valued, its share price can be expressed as the amount offered if the company is sold. If a company is traded on the stock market, investors – or the general public – can buy or sell shares based on that price.
All valuations are, therefore, estimates.
Often only briefly dated – and should be treated as such. Given that there are few easy ways to value a privately owned business, it is essential to understand how valuations may differ and how helpful they can be when conceptualizing the true worth of a company.
Methods of valuation
There are three main methods of valuation in use:
- The first method is to ask a professional valuation firm to do it. This may be a suitably qualified accounting institution or independent financial adviser. Most large company valuations are carried out by an accounting firm, which has access to particularly sophisticated and difficult-to-obtain information.
- The second method is to do it yourself. This can depend on the type of business being valued and how much time is available for research. While this does not guarantee a precise number, the more information and expertise you have, the more likely you are to get close and understand the likely outcome (with some notable exceptions).
- The third method uses a set of parameters and “guesses” a number. While this is unlikely to be anything other than guesswork, it is often perfectly adequate for a medium-sized company with limited information.
- There are also tax implications when valuing businesses, adding further complexity. Also, as accounting firms or independent advisers carry out the majority of large company valuations, consulting an independent adviser is often the best and most cost-effective method of valuing your business.
The most important thing to understand when valuing a company is that it is an estimation and, as such, an opinion on the value of the business. Vanguard Valuations will have spent a fair amount of time preparing for the task and gathering information about similar publicly quoted companies. This information will be used to develop a figure based on facts and figures from previous years.
If you need help with your business valuation to sell your business or raise money from investors, try Vanguard Valuations.