Investment in a new business needs the proper valuation. The
Valuation helps us to make a realistic decision about the financial worth of
the business. But the valuation need some techniques and analysis to get the
actual worth of the running business. Everyone who wants or planning to buy a running
business he needs to follow the 5W’s strategy and business financial statement
analysis techniques to make the realistic decision. Here is the complete concept about the
business actual worth or its financial valuation analysis.
5W’s Strategy:
5W’s
Strategy helps the buyer to make a realistic decision. In actual the 5W’s are
the What, Where, When, Why and Who questions. These questions can be asked to
the seller and can ask to the buyer himself to access their actual objective
and goals for this buying and selling. These questions can be asked as follows:
1: What:
·
What you are buying or
what you are selling?
·
What is you actual purpose
or objective for this activity?
·
What is the actual worth
of the asset you are buying or selling?
·
What are the liabilities
of the business and how you deal with them?
·
What does that venture
actually owns?
2: Where:
·
Where are you buying or
selling the concerned asset or venture?
·
Where you are investing
your capital?
3: When:
·
When you are selling or
buying that venture or asset?
·
Whenever the business
starts paying you in terms of cash?
·
When the business start
paying you?
4: Why:
·
Why you are selling or
buying it?
·
Why you investing in
this specific business?
5: Who:
·
Who is you buyer or
seller?
·
Who actually push you in
this activity?
·
Who is responsible for arbitrage
in case of issues?
These questions gives are the qualitative based or the qualitative
answer which helps us to understand the actual worth and value of a business. Because
the answer of these questions are value able for both buyer and seller to know
about the actual current value of the business.
Analysis of the financial statements:
The
analysis of the financial statements with the help of financial ratios helps us
to know about the actual value of the business assets ,liabilities, earning
revenues, and cash flows. The Income statement is the statement which tells us
about the actual sales or revenues and the expenses which did by the business in
specific period of times. Balance Sheet has the complete information about the
actual worth of assets and liabilities. The Statement of cash flow give us the
information about the total cash which a business used in its operating,
financing and investing activities.
Analysis of the
financial statement always conduct with the help of horizontal and vertical
analysis techniques and further the results will be extract able with financial
ratios.
Cash Flows information:
Before
making decision about the purchase and buying a business you need to make a
proper evaluation of the cash flows and check the trends and make the analysis
over the basis of these information. That helps you to find out the peak and worst periods for revenue earnings and
evaluate the expenses of the business in different periods of time.
Revenue estimations:
Be
remember that the revenue of the business is not stable for every time. The earning revenue always be different from according
to the different seasonal trends. When we trying to estimates the revenue the
discounted cash flow statement helps us to make the analysis.
Other techniques:
The
other techniques for the valuation of the business is Net Present Value, Asset
Valuation, Sales and earnings multiple techniques. Formulas regarding NPV and Asset Valuation techniques are as
follows:
NPV:
-C0 + C1 / (1 + r) + C1 / (1 + r)2 + C1 / (1 + r)3 - - - + CT / (1 + r)T
-C0: Initial investment. C: Cash Flow.
R: Discounting
rte. T: Time
Period.
Asset
Valuation: Total Investment Value – (Depreciation
+ Any other liability)
These are the some of the famous techniques
which helps to evaluate the value of a business. But always prefer to check the
profitability, efficiency, leverage, liquidity and solvency ratios.
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