What Are the Three Methods of Business Valuation?
Why is it important to know how much a company is worth? There are a number of reasons. If you want to buy or sell a business, it?s essential to know what a fair price is. Performing a company valuation can be important if you?re seeking a loan for your business, you regularly report your business? performance to investors, or you?re planning to retire soon. It?s also a good idea to know what your company is worth in the event of an unexpected event like a natural disaster, a divorce, or the death of a shareholder. Although you can hire a professional to appraise the value of your business, you can also evaluate what your business is worth on your own by using a business valuation calculator or other tool.
Whether you decide to hire a business valuation firm or use a company valuation tool yourself, before you start, you will need to determine why you are conducting a business valuation and collect all the information you will need to make an accurate assessment. At the very least, this should include income statements and balance sheets, since your company?s past financial performance plays a big role in its overall value. Ideally, you should have three to five years? worth of financial records to use in your calculations.
Unfortunately, there is no single way to determine the financial worth of a company. Different people will value the same company differently based on perceived risk and projected success in the future. There are three main methods used to estimate the value of a company: the asset approach, the income approach, and the market approach.
The asset approach
The asset approach of valuing a company involves determining the fair-market value of all of the company?s assets and liabilities and calculating the difference between the two. Although this approach might seem straightforward, it runs the risk of overlooking other important aspects of the business that, although not assets or liabilities, still play into the business? overall value. It can also be unclear which assets and liabilities should be included in the evaluation. This method is sometimes used to determine the minimum value of a business.
The income approach
The income approach assesses a company?s worth by evaluating its projected future earnings. However, since these future earnings are only hypothetical, the income approach also deducts a measure of risk from the total amount. There are several methods for valuing a company based on the income approach. Two of the most commonly used are the capitalization method and the discounting method. A business valuation calculator or other tool can help you measure your company?s worth using the income approach.
The market approach
The market approach of business valuation determines the worth of one company by comparing it to other, similar companies. By looking at the typical market value of businesses that provide comparable services to your own, it?s possible to extrapolate the probable market value of your own business. This approach can be particularly helpful if you want to buy or sell a business.
No matter how big or small your company is, it?s important to know what it?s worth. If an opportunity arises to sell the company or take on another business partner, or if an unforeseen complication like a legal dispute occurs, knowing the value of your business can help you be prepared to handle the situation. A professional business valuation service can assess your business? value for you, but if you want to do it yourself, a business valuation calculator may be a helpful tool in figuring out how much your business is worth.
Trackback from your site.