Small business valuation software

Have you dreamed about creating a cutting-edge company, then turning around and selling it for a huge profit? While we have all heard about these kinds of business deals, few actually understand how a company is valued. Thankfully, there are business valuation firms that can recommend the best business valuation tools for your business, but to get a quick breakdown of the different approaches, read below.

The Advantages and Disadvantages of Market- Based Business Valuation.

The market method is used by business valuation firms when a company wants to know the market value of individual assets. This valuation market approach is so-named because it requires some investigation into what similar assets are selling for in the market. Essentially, it is a comparison tool that takes into account how the competition is faring.

The disadvantage of the market valuation method is that it only works when assets similar to your business’s have recently been sold. It is an estimate at best. It does not account for sudden changes in the marketplace that may affect value.

The Advantages and Disadvantages of an Asset- Based Business Valuation.

When a company wants to look at the value of not just an individual asset, but of their company’s net asset value, or NAV, they will use the asset valuation method. To get a clear picture, a business valuation firm takes the total value of the assets minus the total liabilities. The result, as Investopedia says, is “the estimated value of the business.”

A clear disadvantage to this method is that it only works properly if the company’s balance sheets are in order. Transparent reporting will provide an accurate valuation. This method can be tricky when deciding what assets and liabilities to include in the summation.

The Advantages and Disadvantages of an Income- Based Valuation.

This method of valuation works best with real estate. The valuation income approach looks at the income generated from each property the business owns. A business valuation firm will look at the rate of return, ROI, a property is expected to provide in terms of rent paid, otherwise known as the capitalization rate. It may be an estimation, but it is fair.

An income valuation is accomplished by taking the net operating income and dividing it by the capitalization rate. An important factor that plays into a property’s value is the condition it is in, and the location. These factors will influence the price of rent.

The disadvantages to this method is the fluctuating market of real estate. Because there are multiple variables, such as location, maintenance, and demand, this valuation needs to be carefully managed.

As you might have guessed, business valuation analysis is estimation, not exactness. It is an economic exercise that is beneficial for a business to know it’s estimated value. A successful, or in other words, accurate valuation depends on excellent record keeping of the income sheets and balance sheets over the past five years. The value of a business is then found by comparing the recent sale of similar businesses; based upon the assets held; or by looking at the business’s earning power and risk assessment.