Investing for Beginners , investing

The goal of business valuation is to determine the correct market value of a business. Usually business valuation is performed by professional valuators / assessors who have required qualifications for the job. 

There are many valuation methods but the most popular for official business valuation is a DCF (discounted cash flow) valuation. However, relative valuation is even more popular but is used more often for inner needs of the companies but not for official reports. 

A rough business valuation is simple task for experienced assessor but may be complicated for amateur. There are a lot nuances in business valuation and a lot of knowledge including finance knowledge and sector specifics is needed. Sometimes few details may have a critical impact to the value of the business. 

The value of business depends mostly on revenue, cash flow and profits of the future. The hardest challenge is to estimate the ratios for the future period with a satisfactory precision. Every business valuation, even made by the best professionals, has some error in it. It is good if error is not more than 15% percent. But some business sectors (for example construction or real estate development) are hardly predictable and errors may be much higher than that.

Sometimes, value calculated by valuators is far from the real value because wrong method is used. It is easy to manipulate the value during the valuation process and it is very common in financial market that valuators aren’t unbiased and serves someone’s interests. 

If you have doubts about some valuation results, maybe you need to hire some valuation consultants.