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Business valuation refers to the process of determining the current worth of a company, taking into consideration various factors like assets, liabilities, income, management, and the location that the company holds, and the many techniques used to determine value. Determining the value of a business is essential for the company as well as for its stakeholders in making important decisions. The typical standard of the value utilized is known as the fair market value.
Need and Importance for Business Valuation
The fair market value is defined as the price at which a business would change its hands between an independent buyer and seller having the requisite knowledge, and not under any influence, and having access to all of the information to make an informed decision. An analyst, before placing a value on a company, looks at the company’s management, the composition of the capital structure, the prospect of its future earnings, and the market value of its assets.
Business valuation usually demands high-level financial analysis, which should be undertaken by a qualified valuation professional only, with the appropriate credentials.
A common misconception exists that a company is worth these many times EBITDA (earnings before interest, taxes, depreciation, and amortization) simply. However, this does not take into consideration the industry, business risks, cash flow expectations, debt, and more. Not knowing the actual fair market value of the business can cause the owner to sell the business for a lesser price as well as by another business at a higher price than what it is worth. Thus, the cost to do business valuation in Dubai is an excellent and fruitful investment. Sometimes it may save in millions by paying the right price or even by taking the right decision not to invest in an unworthy business.
How to value a company or business in the Dubai?
While there are numerous valuation models available, there are three valuation approaches undertaken in Dubai. They are described in brief here: –
- Intrinsic valuation
Intrinsic valuation refers to the value of an asset to its intrinsic characteristics that are its capacity to generate cash ﬂows and avoid the risk in the cash ﬂows. In its most common form, intrinsic value is calculated with a discounted cash ﬂow valuation, keeping the value of an asset as the present value of expected future cashﬂows on that asset. This is done in cases where cash flows are more predictive in the business.
- Relative valuation
Relative valuation determines the value of an asset by checking at the prices of ‘comparable’ assets that are relative to a common variable like earnings, cashﬂows, book value, or sales.
- Contingent claim valuation
Contingent claim valuation uses pricing models to measure the value of assets sharing option characteristics.
Measuring the value of a business
There are three fundamental ways and some other methods to measure the value of a business practice based on the approaches given above. They include: –
- Asset methods
- Market methods
- Income methods
Under each approach, there are several methods available to determine the value of a business enterprise.
- Asset Method
The asset approach to business valuation in Dubai takes into consideration the underlying business assets for estimating the value of the overall business enterprise. It mostly relies upon the economic principle of substitution and tries to estimate the costs of re-creating a business that can produce the same returns for the owners as the subject business.
The methods under the asset approach are:
- Book value method
- Liquidation value method
- Replacement value method
- Income Method
The Income Approach in the Dubai uses the economic principle of expectation to determine the value of a business. It estimates the future returns expected by business owners from the subject business. These returns are then matched, considering the risk associated with receiving them fully and on time.
The returns are estimated as a single value or a stream of income in the future. The risk is then assessed by discount rates.
The methods that rely upon a single value of earnings are known as direct capitalization methods. Whereas the methods that utilize a stream of income are referred to as the discounting methods. This method accounts for the time value of money directly to determine the value of the business enterprise
The methods of the Income Approach include:
- Price to Earnings or Earnings Multiple/Capitalization of Earnings Method
- Discounted Cash Flow Method
- Market Method
The market approach of business valuation in Dubai refers to the consultation of the marketplace for indications of business value. Sales of similar businesses are studied, and the comparative evidence used to estimate the value of a subject business is collected. It uses the economic principle of competition to estimate the value of a business in comparison to its competitive businesses whose value has been recently established.
The business valuation methods in the market approach are: –
- Comparative company market multiple methods
- Comparable transactions multiple methods
- Market value methods (Quoted securities)
Some of the methods of business valuation which are as follows:
- Contingent claim valuation
- Price of recent investment method
- Rule of thumb
The approaches are given above yield estimates of the value of the same asset at the same time. To grasp the process of valuation, you have to understand and use all the approaches. There exist different times and places to use them and mastering the knowledge of the methods is an important part of the valuation process. There is no single or method that can be called definitive. Hence, it should be a common practice to use several business valuation methods under each approach. The business value is determined by reconciling the results obtained.
There are certain houses which help businesses with the highly efficient and professional approach by qualified professionals in the related field of work by providing a wide range of Audit and assurance services to all the Emirates in Dubai including Dubai, Abu Dhabi, Ajman, Sharjah, Fujairah, and Ras Al Khaimah