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How to establish True Value of Your Business in the UAE

Establishing the true business valuation in UAE would require a detailed evaluation through a systematic valuation technique. The professional services to assist you in business services determine the accurate transaction value whenever you are to do a buy, sell or share transfer in a business. A wide range of service providers in UAE offers business valuation services, especially to deal with fund managers, portfolio companies, and investors.

Find the right approach

When you are to select an organisation for the business valuation services check for the past performance they have intended with. Simply reviewing the past performance would not count but rather tend to perceive the atmosphere and the internal resources they are providing the solution with. Their intellectual capital also matters and would reflect their future earning capabilities. 

The business valuation is divided through one or a combination of more than one of the following systematic approaches:

  1. Assets-based
  2. Market-based
  3. Discounted Cash flow-based
  4. Income-based

Assets based approach

Asset-based business valuation is a method of determining the value of a company by assessing its assets, both tangible and intangible. This approach involves calculating the total value of a company’s assets, including real estate, equipment, inventory, and intellectual property. Then, the total liabilities of the company are deducted from the asset value to arrive at the net asset value. This approach is commonly used for businesses with significant assets or those in industries where the value of the assets is the primary driver of the business’s worth. However, it may not provide an accurate representation of the business’s true value, particularly in cases where the business’s value is primarily derived from its potential for future earnings.

The market approach

Market approach business valuation is a method of determining the value of a company by analyzing the prices of similar businesses that have recently sold in the market. This approach involves comparing the target company’s financial and operational characteristics to those of similar businesses, which have sold in the same industry and geographic location. By examining the multiples, such as price-to-earnings (P/E), price-to-sales (P/S), or price-to-book (P/B) ratios of these comparable businesses, an estimate of the target company’s value can be determined. The market approach is a widely used valuation method, as it reflects the current market conditions and considers the opinions of multiple buyers and sellers in the industry.. 

Discounted Cash Flow Approach

The discounted cash flow (DCF) method is a widely used approach to valuing a business by forecasting its future cash flows and discounting them to their present value. This method takes into account the time value of money and considers the risk associated with the future cash flows. The DCF method involves estimating the free cash flows of the business over a specific period and then forecasting the cash flows beyond that period, typically for a period of 5-10 years. The free cash flows are then discounted back to the present value using a discount rate, which represents the return required by investors to compensate them for the risk of investing in the business.

The DCF method is widely used because it provides a comprehensive and detailed view of a company’s financial performance, and it considers the impact of a company’s future growth potential on its value. However, the accuracy of the DCF valuation heavily depends on the assumptions used in the forecasted cash flows and the selection of an appropriate discount rate. Therefore, it is crucial to perform a sensitivity analysis and to consider various scenarios to assess the business’s value under different market conditions. 

Income-Based Approach

The income multiple method is a business valuation approach that uses a multiple of the business’s income to determine its value. This method involves calculating a ratio of the business’s income, such as earnings before interest, taxes, depreciation, and amortization (EBITDA), to a market-determined multiple. The multiple is typically based on the industry, business size, growth prospects, and risk factors. The result is an estimate of the business’s enterprise value, which includes the value of both its equity and debt. This method is commonly used in industries with a history of stable income streams and where there is a readily available market for comparable businesses. However, it may not provide an accurate valuation for businesses with unique characteristics or where earnings are subject to significant fluctuations. 

The choice of a business valuation method depends on various factors, including the nature of the business, the industry, the purpose of the valuation, and the availability of data.

  • If the business has significant assets, such as real estate, inventory, and equipment, then an assets-based approach may be appropriate.
  • If there are comparable businesses with recently sold prices in the market, then a market-based approach can be used.
  • If the valuation is for a company that is expected to generate significant cash flows in the future, then the discounted cash flow (DCF) method may be appropriate.
  • Lastly, if the company has a stable and predictable income stream, then the income-based approach can be used.

It is important to note that each method has its strengths and weaknesses, and the selection of the appropriate method should be based on a thorough analysis of the business and the specific circumstances of the valuation.
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