Business valuation is a set of techniques, processes, and procedures used to determine the value of a business.
Different types of methods for business valuation
There are three broad and popular approaches to business valuation. These approaches are called business valuation methods which can be used to calculate your business value.
All the methods under the business valuation approach depend on the similar set of economic principles. The procedures and approach may vary depending on the type of business, industry and various other factors.
Below is a brief overview of each of the following business valuation methods.
Asset-based business valuation methods
These are also referred as the cost-based methods. Asset based valuation methods estimate business value based on the costs that may be required to create another business of similar economic utility.
The popular methods under these asset approaches are as follows.
Asset accumulation method: This method is for calculating the market values of business assets and liabilities. The difference is usually the business value. This method differs from the typical cost accounting balance sheet. There may be important off balance sheet assets include internally developed intellectual property, customer lists, and business agreements that may be left from the business valuation. Also, this method accounts for contingent liabilities such as pending legal action and costs associated with regulatory compliances.
Excess earnings method: This is the classical asset-based business valuation method and is popularly called as capitalized excess earnings method or treasury method. In addition to business value calculation, this method allows you to determine the value of business goodwill.
Income-based business valuation methods
As the name indicates, the business value is based on the income producing capacity and risk.
The most popular and important business valuation technique used by these methods are capitalization and discounting. Business risk is calculated in the form of discount and capitalization rates.
Most popular Income business valuation methods are:
Capitalization of earnings
Multiple of Discretionary earnings
Discounted cash flow
The popular capitalization method is Multiple of Discretionary Earnings. The Discounted Cash Flow business valuation method is the simplest way of determining business value by discounting income.
Market-based business valuation methods
These methods help you determine business value by comparison to selling prices of similar businesses.
The popular market-based business valuation methods are as follows:
Guideline publicly traded company method
Comparative transaction method
The above two types of methods work by comparing the subject business to similar companies that were sold recently.
For privately owned businesses, recently sold businesses of similar type provide excellent comparable. The quality of this data may not be as reliable as compared to the public listed companies. Transactions that major involve small capitalization of public companies are often used as evidence of the business value of privately owned firms. Valuation formulae from comparable business sales are the standard way to calculate the business fair market value.
Which is the right business valuation formula for your business?
The answer is it depends. The above are just the most popular. Our team of professionals meets with you to gather data about your business, industry and we use the most widely accepted methods to value your business.