University of the People

MBA Program

Assignment 5

Bus5111
In this assignment, I will discuss business valuation and its methods.

Introduction:

To start with, business valuation has different approaches as each business is different from the

others, and it is hard to encounter all of them in one approach. Three approaches are developed:

• Asset Based Approach: which is the market value for assets – liabilities.

• Income-Based Approach: which is the forecasted revenue that is based on previous data

• Market Approach: The value of the business is upon the selling price in comparison

with another similar item sold

Business Valuation Methods:

Several methods are found to tackle a business valuation, such as:

• Market Capitalization is one of the easiest ways to do this. If the company is public,

then the number of shares multiplied by the share price with result in the business

valuation, and if the company is privately owned, then previous selling prices of similar

businesses will be used for evaluation (Accounting Tools, 2021)

• Book Value: In summary, it is found in the balance sheet which is the shareholders’

equity (Total value of assets – liabilities) (Seth, 2021).

• Future Earning: it is discounted forecasted earnings + the salvage value of assets.

Adjusting the values with a discount rate would result in value (Chan, 2021).

• Earnings Multiplier: it is the multiplication of the earnings by a factor that is based on

the economic environment, service, and industry (Ward, 2021).

What are the Pros and Cons. Of Business Valuation?

 Method Advantages Disadvantages

Market Capitalization • Simple • Data shortage

• Cheap • Reliability of data

• Real data are used concerns

• Mostly used for public • Fluctuation with

companies (Seth, market prices

2021) • Accuracy for private

companies is missing

(Seth, 2021)

Book Value • Works with • Negligence of current

companies with big and forecast earnings

assets • Not suitable for small

• Simple businesses

(Accounting Tools,

2021)

Future Earnings • High accuracy level • Very expensive

• Discount rates depend

on experts which can

be wrong (Chan,

2021)

Earnings Multiplier • Simple • Power of assets is

• Works for small neglected

businesses
 • Experts’ calculations

are involved which

can be wrong

Conclusion:

In Conclusion, many approaches are there for business valuation, and choosing the suitable one

for your company is not easy, and it should involve experts to decide. Of course, the choice

should be decided upon the type of business. Personally, I would recommend mixing all the

methods together, checking the results, and then deciding which one is suitable and has the

accurate numbers.
References:

• Accounting Tools. (2021, April 13). Book value

definition. Accountingtools. https://www.accountingtools.com/articles/what-is-book-value.html

• .Accounting Tools. (2021, April 14). Market capitalization

definition. Accountingtools. https://www.accountingtools.com/articles/market-capitalization.html
• Chan, J. (2021, August, 13). Future Value
(FV). Investopedia. https://www.investopedia.com/terms/f/futurevalue.asp
• Seth, S (2021, January, 17). Book value vs. market value: What's the
difference? Investopedia. https://www.investopedia.com/articles/investing/110613/market-value-versus-
book-value.asp
• Seth, S. (2021, August 18). Market capitalization
defined. Investopedia.https://www.investopedia.com/investing/market-capitalization-defined/.
• Ward, S. (2021, June 21). 3 business valuation methods: How to valuate a
company. TheBalance. https://www.thebalance.com/business-valuation-methods-2948478