Question

What is the six step process involved in valuation?

List the six steps in sequence, explaining the importance and relevance of each step.

Answer 1

The six steps involved in the process of valuation are

1. Why is the business being valued.

Valuation begins with creating an understanding of why the business is being valued becuase the purpose of valuing the company will help in deciding on other factors of valuation.

2. Gathering information.

Whatever be the purpose , it is essential to gather all the information available about the company. 4-5 years of financial statements is ideal. The lease agreements of the company, the debt , the performance , customer review of the company etc are collected.

3. Recast the financials.

There are many businesses which are run by their owners. To make correct valuations personal expenses and salaries of business owners are added back to get correct operating profits.

4. Choose the business valuation approach

There are different approaches to value business , income approach, asset approach and market apprach. The correct approach should be chosen based on our purpose and the information available with us.

5. Apply the business valuation approach.

Once the data has been collected and the approach has been chosen , everything can be assemble to get the desired result and get the value of the business.

.6. The business value conclusion.

The resulting value and the purpose is matched to make the decision .