Three Methods Of Business Valuation Every Business Owner Should Know

2 August 2016
 Categories: , Blog

As a business owner, understanding the value of your business as well as any you're considering partnering with is important. If you're fairly new to the business world, you may not understand exactly how to do this. There are three primary approaches to consider, and while you can work with a business valuation specialist, you may be able to do it on your own as well.

Income Valuation

The income valuation approach focuses specifically on the income that the business produces. It determines the company's value according to that income. In most cases, the income valuation requires that you look at the current cash flows and estimate the future growth with a calculation that takes into consideration any potential loss or discount risk you may assume going forward. This gives you an idea of what the company is worth now and likely to be worth moving forward. It is an objective way to look at businesses with recurring payments, such as subscription service companies and retail environments.

Market Valuation

The market valuation method takes a different approach. It relies on information that's available in the company's given marketplace to determine the operational value. It's based on the idea that in any given period of time, markets will ultimately adjust to create balanced pricing for similar products. As a result, the market approach focuses on market data by asset type. To value a business this way, you determine the multiples of each asset value based on what you anticipate the market to balance out at. If it's expected that values will increase, you'll multiply your asset values by that anticipated increase. Applied to the earnings, cash flow, revenue and customer base, this gives you an estimate of the company's growth potential.

Net Asset Valuation

With a net asset process, the company is valued based on the actual book value of the assets that they record in the current market. To use this method, you need an appraiser to complete a fair market value appraisal. Once you have those values, you can then adjust the current balance sheet estimates accordingly to determine the value of the business. This is a popular option when you're dealing with investment companies and those with a lot of capital assets on the books.

Now that you understand the three most common methods for business valuation, you can decide which one suits your situation best. Talk with a specialist like The Ostermueller Group if you aren't sure of the best way to proceed.