Business Valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. Valuation is used to determine the price that the investors are willing to pay or the business owners are willing to receive for the sale of a business. Whether you're ready to sell or buy a business in Hungary or just planning for the future, knowing its correct value is more than indispensable in order to achieve the highest sale price and the lowest tax impect after a sale. Determining the “fair market value” of a business is important not only when the owner is putting up a “for sale” sign, it also can be useful for further business improvement programs and any other strategic planning.
The goal of a methodical business valuation process is to arrive at a clear and supportable estimate of - fair market value - the price at which the property will change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having a reasonable knowledge or relevant facts.
Book Value on an accounting level is defined as balance sheet assets less liabilities. However, most businesses are sold at prices well above book value, because the balance sheet shows assets at original cost less accumulated depreciation, not true replacement value, and we did not speak about the value of the knowhow. Most business advisors use more sophisticated valuation methods than book value:
Discounted Cash Flow – This method, often used to value businesses or companies with volatile earnings, begins by forecasting future earnings over several years. First of all a business plan is needed and to account for the time value of money, a discount rate is then applied to each year of forecasted earnings. The discount rate reflects a weighted average cost of capital for similar industrial companies. Finally, the business value is the sum of all discounted cash flows over the forecast period plus the discounted residual value.
Comparable or Multiply Method – Through using multiplies; Business Value can be estimated, by analyzing recent sales of comparable companies in the same market or industry. For this method it is nessecary to know the Hungarian market and business valuations in Hungary. This method shows the present market price of a business and do not deal with the future and with any synergetic effect.
The end result of the business valuation this process is a document in which the advisor describes the methodology and provides an estimated fair market value. In summary, although many business owners have an idea of what their companies are worth, most are merely guessing – and over time, wrong guesses can prove costly. In the worst case, not knowing fair market value could cause owners to sell businesses for less than they actually are worth. For these reasons, the cost to hire a professional business valuation process usually is money well spent.
Katalin Ballun is the CFIE business valuation specialist in Hungary. Feel free to inform for business valuations on the Hungarian market or learn more about our member M&A advisor Katalin Ballun.