what is a business valuation 
a business valuation also known as a company valuation is the process of determining the economic value of a business during the valuation process all areas of a business are analyzed to determine its worth and the worth of its departments or units a company valuation can be used to determine the fair value of a business for a variety of reasons including sale value establishing partner ownership taxation and even divorce proceedings owners will often turn to professional business evaluators for an objective estimate of the value of the business investopedia katie kerpelthe basics of business valuationthe topic of business valuation is frequently discussed in corporate finance business valuation is typically conducted when a company is looking to sell all or a portion of its operations or looking to merge with or acquire another company the valuation of a business is the process of determining the current worth of a business using objective measures and evaluating all aspects of the business a business valuation might include an analysis of the company s management its capital structure its future earnings prospects or the market value of its assets the tools used for valuation can vary among evaluators businesses and industries common approaches to business valuation include a review of financial statements discounting cash flow models and similar company comparisons valuation is also important for tax reporting the internal revenue service irs requires that a business is valued based on its fair market value some tax related events such as sale purchase or gifting of shares of a company will be taxed depending on valuation 1estimating the fair value of a business is an art and a science there are several formal models that can be used but choosing the right one and then the appropriate inputs can be somewhat subjective methods of valuationthere are numerous ways a company can be valued you ll learn about several of these methods below market capitalization is the simplest method of business valuation it is calculated by multiplying the company s share price by its total number of shares outstanding for example as of january 3 2018 microsoft inc traded at 86 35 2 with a total number of shares outstanding of 7 715 billion the company could then be valued at 86 35 x 7 715 billion 666 19 billion under the times revenue business valuation method a stream of revenues generated over a certain period of time is applied to a multiplier which depends on the industry and economic environment for example a tech company may be valued at 3x revenue while a service firm may be valued at 0 5x revenue instead of the times revenue method the earnings multiplier may be used to get a more accurate picture of the real value of a company since a company s profits are a more reliable indicator of its financial success than sales revenue is the earnings multiplier adjusts future profits against cash flow that could be invested at the current interest rate over the same period of time in other words it adjusts the current p e ratio to account for current interest rates the dcf method of business valuation is similar to the earnings multiplier this method is based on projections of future cash flows which are adjusted to get the current market value of the company the main difference between the discounted cash flow method and the profit multiplier method is that it takes inflation into consideration to calculate the present value this is the value of shareholders equity of a business as shown on the balance sheet statement the book value is derived by subtracting the total liabilities of a company from its total assets liquidation value is the net cash that a business will receive if its assets were liquidated and liabilities were paid off today this is by no means an exhaustive list of the business valuation methods in use today other methods include replacement value breakup value asset based valuation and still many more accreditation in business valuationin the u s accredited in business valuation abv is a professional designation awarded to accountants such as cpas who specialize in calculating the value of businesses the abv certification is overseen by the american institute of certified public accountants aicpa and requires candidates to complete an application process pass an exam meet minimum business experience and education requirements 3 and pay a credential fee as of mar 11 2022 the annual fee for the abv credential was 380 4maintaining the abv credential also requires those who hold the certification to meet minimum standards for work experience and lifelong learning successful applicants earn the right to use the abv designation with their names which can improve job opportunities professional reputation and pay in canada chartered business valuator cbv is a professional designation for business valuation specialists it is offered by the canadian institute of chartered business valuators cicbv 