Business valuation is the backbone process for investment or entrepreneurship and corporate finance.
Microsoft Excel is decently accessible to a layman to start valuing the business. Here, a guide will help you know the basics to make use of this software, to find out a company’s value from a basic understanding of financial statements to the final valuation formula.
1. Understanding Business Valuation Basics
Business valuation is defined as the process of figuring out the economic value of an enterprise. It typically applies whenever a company plans to do a merger or acquire someone else’s business, seeking funds from investors, or evaluating the performance of any business. Several assumptions are made on the assets, liabilities, revenues, and growth in attempts to reach an approximation of the fair value.
The most prevailing of such is Discounted Cash Flow and Comparable Companies Analysis. And all these calculations can be derived and represented perfectly with the help of the excel sheets.
2. Setup for Business Valuation in Excel
First of all, an organized structure of an Excel sheet for easy use should be started, and then a worksheet may either be set up in order or divided into sections to begin performing calculations.
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Income statement: portrays the total income that the firm has obtained and the expenses incurred by the firm in a specific period of time.
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Balance Sheets: It is the statement that tells us about the current status as far as the assets, liabilities, and equity of any company are concerned for some period of time.
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Cash Flow Statement: Here, you can also trace out when what kind of inflow outflows actually occurred in some given concern for some point in time.
Assign some convenient names to the worksheets such that while arriving at some valuation, it is handy to refer those sheets at your will and choice.
3. Gathering Financial Data
For valuing a business, you would require current financial data. Some of the essential types of data required are:
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Revenue Growth: Average growth in revenue over previous years, which may be helpful in estimating future earnings.
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Operating Expenses: This would consist of ordinary costs that are continuously operating the business like rent, salaries, and utilities.
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Depreciation and Amortization: This is the loss of value for assets like equipment over time.
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Capital Expenditure CapEx: This would be investments in fixed assets such as equipment or property.
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Working Capital: This would be the difference between current assets and liabilities.
This will be the number that could be read from the financial statement of the company or in annual reports. Inputting the numbers in Excel to format so you can simply refer to those numbers on your work for valuation.
4. Discounted Cash Flow Analysis in Excel
This method takes into account the worth of the company based on the cash flows it would yield in the future. Below is how you may implement this in Microsoft Excel.
Step 1: Cash Flow Estimation
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Prepare a table of projections and calculation of forecasted revenue, expenses, taxes and the resultant cash flow over subsequent years
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Estimate for past projections so that you may calculate the growth, an estimate of the upcoming expense that you are to depend on.
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The best source of these will be through an excel formula called =AVERAGE.
Step 2 Calculate Discount Rate
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Discount rate is the expected risk or return of investors. The most commonly used discount rate in finance is the Weighted Average Cost of Capital (WACC).
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WACC is the sum of cost of equity and cost of debt. But if you have both expected return and period, it will make your life easier just to use the =RATE function from Excel.
Step 3: Calculation of Present Value of the Cash Flows
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And there you use the =PV function in Excel to net all the way back the cash flows of each year down to their today’s value. And in that example, you’d assumed a cash flow you’d project for Year 1, say as high as $100,000, and you took a 10 percent discount rate. So in that kind of situation, your formula would look something like this: =PV(0.10, 1, 0, -100000).
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Now you total those present-value cash flows and you get an overall business value.
5. Applying Comparable Companies Analysis (CCA)
In the use of the Comparable Companies Analysis, one compares the firm with other firms within its same industry. How it is done is this:
1. Identify comparable companies: Identify firms in terms of size, industry and having comparable financial performance.
2. Collect Multiples: Collect multiples corresponding to financial ratios of such companies, for example, the P/E, EV/EBITDA, or even PS. This way you may put all such figures on an Excel to take averages for every multiple.
3. The Multiple: This multiple works exactly on the same financial data set for your company. Thus, you are able to establish the industry multiple by deduction from the value in multiples. Example: an assumed multiple 5 times, assuming this is based on EV/EBITDA that produces an emerging EBITDA within the target company’s P&L value. On this basis, for value $200,000 as EBITDA the valuation amounts to approximately $1 million.
These can be simplified using =AVERAGE and =PRODUCT functions in Excel.
6. Creating a Sensitivity Analysis
This sensitivity analysis will tell you what would happen if the assumptions had been changed. Then you can apply Data Tables in Excel to test different scenarios. You might want to have discount rates at 8%, 10%, and 12% and then see what will happen to your valuation because of it.
This you will do on Excel with a Data Table in Data, where the discount or growth rate can be shown. This you would gain, to then have some understanding on how reliable your calculation actually is.
7. Putting Everything into Finishing Flourishes.
Revise on your outputting work and:
Confirm for all these that formula correct and freshness of information intact.
Clearly mark spread sheets so that people can easily track the calculations through.
If you are disclosing the valuation, make sure you have a summary page wherein you point out all final valuation figures with assumptions used in each different method. This textbook is a base, though more learning and practice are going to help you only get better at the informed appraisals. The final product of acquiring such knowledge and mastering this task should be a feeling of having a useful part of your investment weaponry if you can take such a tool to more normal investment choices or simply good business planning.
Conclusion
Using Excel for business valuation is the most powerful and easiest means of attaining insight into a firm’s worth. Proper structuring, both in a structured approach toward data gathering and cash flow projections coupled with proper analysis, enables a simple spreadsheet to prove itself to be a model of financial representation that might guide strategic decisions. Whether you are an entrepreneur trying to value your business, an investor considering the purchase of a business, or a finance student studying valuation principles, this knowledge will help you feel confident in approaching financial analyses.
Now, through DCF, you can forecast the cash flows of the company and therefore arrive at a present value, so you get forward-looking valuation view. Then through CCA, you receive an industry-based view of which you can infer on where the target company is in comparison to its peers. Then, when applying sensitivity analysis, you develop an even better feel about the way a business will be behaving under various circumstances.
This is the beginner’s guide to greater complexities in financial modeling and valuation. With such comfort in the use of these approaches, further digging could take place through the way of Monte Carlo simulations, scenario modeling, or more refined techniques in valuations. It will master business valuation in the hands of Excel as it will boost your analytical prowess and further hone your sound strategic financial decision-making abilities. The more you know, the better you are going to navigate through the business and finance world.