When looking at the process of Business and Company valuation, quite often the words business and company are used interchangeably. However, in the business valuing profession , there is a vast difference between the two.
The structure of a business is relatively easy to set up and doesn’t involve much money or paperwork. The structure is simple and this is why most people starting out choose to register a business.
A company on the other hand, is a separate legal entity and provides for limited liability as well as corporate tax rates. A company structure is more complicated and expensive to set up, but offers more protection and benefits for the owner.
The process of a business and company valuation is also quite different.
Most small business valuations are based on a multiple or return on investment of SDE. SDE stands for Seller Discretionary Earnings and is a method whereby the earnings are adjusted to adjust for owner- operator expenses. These adjustments include the owners or sellers wages.
Small to medium sized Companies are valued using the EBITDA method. EBITDA stands for Earnings Before Interest Taxes, Depreciation and Amortisation and is a standard way of measuring a company's cash flow.
Private v Public
Private company valuations are discounted based on several risk factors associated with private sector investing, which results in a marked difference between the valuation of a privately held company, subsidiary or a division and a publicly traded corporation. There are a number of distinctions between private and public companies that have an impact on the private company’s value. An accurate valuation of privately owned companies largely depends on availability and reliability of the private company's historic financial information. Public company financial statements are officially audited, documented and overseen by a government regulator. Alternatively, private firms do not have government oversight unless operating in a regulated industry and usually audited financial statements are not required.
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