How can you explain business valuation to stakeholders?

- Explain that business valuation is the process of determining the economic value of a business. - Identify stakeholders and understand their perspective to tailor your explanation to their knowledge level. - Explain the different valuation methods used such as income approach, market approach, and asset-based approach. - Explain key factors that influence business valuation such as revenue growth, profitability, market demand, competitive landscape, intellectual property, customer base, and risk factors. - Use financial statements to illustrate financial performance and position of the business. - Explain how valuation impacts decision-making, financial planning, investment, negotiation and overall perception of the business.

Investors often use market capitalization and enterprise value interchangeably when discussing the valuation of a company. However, there is a big difference between the two metrics. Below I will try to resolve the confusion and clarify what each of them calculates.

The term “market capitalization” is one of the simplest ways to understand the market value or size of a company. The term market capitalization refers to the non-book value of the company's own funds. Therefore, it is the market value of its shares. This metric evaluates the market value of a company based solely on its shares. As such, calculating a company's market capitalization is not a big task as it simply involves multiplying the current stock price per share and the total number of shares outstanding. In short, it is what in Anglo-Saxon terminology is known as equity value. It is nothing more than the price at which shares are exchanged in a purchase and sale operation. But let's not forget when you buy a company, it is complex.

Enterprise Value (EV) is a measure of the total value of the company, after taking into account its market capitalization, non-operating assets, short- and long-term financial debt, minority interests, and equity. preferred. The metric stands out essentially for representing the total value of the company, if it were to be absorbed by another company. Enterprise value = Market capitalization Liabilities and equity items representing other groups of investors (i.e., in addition to common shareholders) – Non-operating assets Among liabilities and other equity items that represent other investors (beyond common shareholders) we can find financial debt, preferred shares, minority interests, etc.

Enterprise value takes into account the debt that the company has taken on, while market capitalization only considers equity capital. When a company is acquired, the buyer also acquires the company's debt. Therefore, enterprise value is a much more comprehensive metric than the commonly used market capitalization.

Engaging in dialogue with stakeholders is crucial to explaining business valuation effectively eg, during a presentation to investors, encourage questions and feedback to address any uncertainties or objections they may have. Listening to stakeholders' views and concerns is essential for building trust and credibility in the valuation process. Providing evidence and arguments to support your valuation helps stakeholders understand the rationale behind the numbers. Addressing objections and disagreements with transparency and professionalism demonstrates a willingness to collaborate and find common ground. Showing stakeholders how the valuation can benefit them and create value is key to gaining their buy-in.

However, the first experiences of relationships with stakeholders, which are often called 'first generation', responded to external pressures, with a limited focus on issues that generated some immediate conflict. Progressively, many companies, seeing the advantages of a more proactive, open and constant dialogue, have begun to develop more systematic approaches to managing relationships with their stakeholders. These second-generation relationship activities have demonstrated their potential to increase mutual understanding, manage risks, and resolve conflicts more effectively.

In recent decades, we have witnessed an unprecedented growth in the relevance of companies in society, so that they play a much more important role than before. Its activities have a decisive economic, environmental and social impact on society, both locally and globally. In many countries, companies actively participate in the development of public policies and changes in legislation. The wave of privatizations and the growing formation of alliances have increased the role of the private sector in the provision of services traditionally considered public; There is even greater participation by large private companies in international development activities, often in collaboration with international organizations, which constitutes a change

On the other hand, the influence of civil society organizations has also increased. In response to the growth of the role of companies in society, more and more social groups demand to be informed, to be consulted and to participate in corporate decisions. In many developed countries, these demands have been incorporated into current legislation, forcing companies to consult different groups of stakeholders before making potentially high-impact decisions. Many corporations have begun to consider the participation of a variety of actors and entities in social, environmental and economic issues as an important aspect of managing their operations.

The company value includes minority interests, which are the participations of third parties in companies dominated by the dominant company of the group of companies, and which are included in the liabilities of the consolidated accounts of the groups of companies. Minority interest is treated as a non-current liability on the balance sheet of companies with majority ownership in the company. Non-operating assets can be very different. Typical examples are treasury, financial investments, rental properties if it is not a real estate company, etc.

Avoid overly technical jargon. You can explain your business valuation using methods like the market approach, e.g comparing the price of used cars. When you're looking to buy a used car, you consider similar cars of the same make, model, and year. Their selling prices give you a good idea of what a fair price for your target car should be. Similarly, the market approach in business valuation compares a company to similar businesses in the same industry that have recently been sold. By analyzing their selling prices, you can estimate the fair market value of your own company. Also, don't shy away from mentioning potential opportunities for future growth that could further increase valuation.

Preferred shares, although they incorporate the term stock, for valuation purposes are not shares but debt. An issue of preferred stock that must be redeemed by a specific date at a particular price acts like debt. Since capital is also contributed by preferred shareholders, it is important to include their value when determining the total acquisition cost of the company.