Company Valuation Models
The valuation models for companies are the instruments used to assess the worth of your business. They consider a number of aspects, including income statements and balance sheets, as well as business models and market conditions. It is essential to get an accurate estimate of the value of your company and not just for yourself but also for lenders and investors in the future. There are many different valuation models that are available, each with its own strengths and weaknesses and appropriate use cases.
One of the most widely used methods for valuing the growth of a private company is the discounted cash flow method which analyzes your company’s past cash flow benefit stream and then divides it by a capitalization rate in order to get an estimate of value. Finding the correct historic cash flow benefit stream can be difficult because there are numerous variables to take into consideration. For instance, you need to determine your capitalization percentage which is a function based on the risk you perceive with the economic benefit stream you choose to capitalize or project. It can be very different between businesses.
Another popular valuation method is the cost to duplicate method which analyzes your company in relation to what it would cost to build a similar company from scratch. While this approach is simple, it does not examine intangible assets or future revenue potential. There are other valuation methods available however they typically rely on subjective perceptions of the value of your business and can be inconsistent or inaccurate.