Quick Guide to Business Valuation Methods

Let’s face it, the goal of many business owners is to build a company that can ultimately be sold for a large profit. While this may be the end goal, how to go about doing this can be quite difficult. This is why an entire industry has been created to deal with business sales and acquisitions. Sometimes, entrepreneurs are great at building businesses, but not always at selling them. Entrepreneurs tend to have so much invested in their businesses that they are not able to emotionally detach from the situation.  Hiring a business valuation consultant can help bridge this gap and often allow business owners to receive more money for their business than they would have otherwise. There are three primary business valuation methods that are broken down below.

Net Asset Method

When business valuation professionals use the net asset method to value a business they are looking at assets and liabilities to determine the value of a business. The asset method takes the actual assets minus the liabilities of a business and uses them to determine a fair value for a business. The trouble with this method is that assets do not always equal value. For instance, if your company possesses significant intellectual property, these properties may not be completely included in the balance sheet assets. Another reason is the accelerated depreciation methods may be used on the asset value which lowers the real market value of the asset. These examples are why business owners should have issues with business valuation methods that focus only on net assets and nothing else when determining the market value for a company.

Market Method

The market approach to business valuation is one of the business valuation methods which attempt to use the free market to determine the value of a business. This method uses historical transactions to determine what is fair in terms of a sales price for both the buyer and seller. To effectively complete this type of business valuation, it is important to find comparably valued companies that can be used to help determine the value of the business in question. This allows valuation professionals to attach a market-driven price to a certain company as opposed to a random number which has no meaning in the actual industry.

Income Method

The income method attempts to take into consideration the present value of the business as well as any risk that could be considered in terms of the future earnings of the business. This method of valuation attempts to take the expected future earnings and risk and put them in today’s terms. To do this, the income method uses Capitalization and Discounting to attempt to fairly value a business. To put it simply, capitalization gives the buyer and seller a factor that can be used to determine future earnings to add to the present value of a business. The discounting method works a bit differently in that you attempt to project what future income will be on the front end to ultimately come up with a present value for a company.

While it is true that there are several different business valuation methods, they do not have to be confusing. If you have questions about selling your business, it is wise to enlist the services of a business valuation professional who can give you sound advice as to how to go about selling your business. These professionals will be able to point you in the right direction in terms of which valuation method to use to sell your business.