The models that are used to determine the value of your business are called company valuation models. They look at a variety factors, such as income statements and balance sheets as well as the market conditions and business model. A precise estimation of your company’s value is vital not only for your financial dealings but also for future lenders and investors. There are a variety of different company valuation models that you can choose from, each with its own strengths, weaknesses, and appropriate use cases.
One of the most widely used methods of valuing private companies is the discounted cash flow method which analyzes your company’s past cash flow benefit stream, and then divides it by a capitalization percentage to arrive at an estimated value. Finding the proper historical cash flow benefit stream could be difficult due to the many variables to consider. You have to, for instance, determine your capitalization rate which is a function based on the discover this risk you perceive from the economic benefit stream you decide to invest in or project. This can vary greatly between businesses.
Another method of valuation that is popular is the cost-to-copy approach which analyzes your company based on the experience of having to create a similar company from scratch. Although this method is fairly simple, it does not look at intangible assets as well as future revenue potential. There exist other valuation methods to choose from however they typically rely on subjective perceptions of the value of your company and may be inaccurate or inconsistent.