Best Business Valuation Methods

**Shonaria** · 03-17-2010 02:54 AM

Hallo,
A Business Valuator (or anyone valuating your business) will use a variety of business valuation methods to determine a fair price for your business, such as:
1) Asset-based approaches

Basically these business valuation methods total up all the investments in the business. Asset-based business valuations can be done on a going concern or on a liquidation basis.

* A going concern asset-based approach lists the business net balance sheet value of its assets and subtracts the value of its liabilities.

* A liquidation asset-based approach determines the net cash that would be received if all assets were sold and liabilities paid off.

2) Earning value approaches

These business valuation methods are predicated on the idea that a business's true value lies in its ability to produce wealth in the future. The most common earning value approach is Capitalizing Past Earning.

With this approach, a valuator determines an expected level of cash flow for the company using a company's record of past earnings, normalizes them for unusual revenue or expenses, and multiplies the expected normalized cash flows by a capitalization factor. The capitalization factor is a reflection of what rate of return a reasonable purchaser would expect on the investment, as well as a measure of the risk that the expected earnings will not be achieved.

Discounted Future Earnings is another earning value approach to business valuation where instead of an average of past earnings, an average of the trend of predicted future earnings is used and divided by the capitalization factor.

What might such capitalization rates be? In a Management Issues paper discussing "How Much Is Your Business Worth?", Grant Thornton LLP suggests:

“Well established businesses with a history of strong earnings and good market share might often trade with a capitalization rate of, say 12% to 20%. Unproven businesses in a fluctuating and volatile market tend to trade at much higher capitalization rates, say 25% to 50%.”

3) Market value approaches

Market value approaches to business valuation attempt to establish the value of your business by comparing your business to similar businesses that have recently sold. Obviously, this method is only going to work well if there are a sufficient number of similar businesses to compare.

Although the Earning Value Approach is the most popular business valuation method, for most businesses, some combination of business valuation methods will be the fairest way to set a selling price.

Thank you

**nick25** · 03-17-2010 03:04 AM

The two primary most widely used and accepted types of valuations are asset value and income value.

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Asset valuations consider the business to be a collection of assets that have a marketable value to a third party in an asset sale. Asset valuations are typically used for businesses that are ceasing operation and for specific types of businesses such as holding companies and investment companies. Asset valuation methods include the book value method, the adjusted book value method, the economic balance sheet method, and the liquidation method.
*
Income valuations are based on the premise that the current value of a small business is a function of the future value that an investor can expect to receive from purchasing all or part of the business. Income valuations are the most widely used type of valuation. They are generally used for valuing small businesses that are expected to continue operating for the foreseeable future. Income valuation methods include the capitalization of earnings method, the discounted future income method, the discounted cash flow method, the economic income method, plus other formula methods.

**chris27** · 03-20-2010 11:50 AM

Hello Friends

They are a number of professions that offer business valuation services. In most areas there is no specific regulation of this profession. Business valuation services are not usually a primary source of revenue, so locating business valuation professionals can be difficult. Here are some types of professionals that commonly offer business valuation (BV) services.
1. CPAs. Many CPAs offer BV services in addition to their normal accounting, auditing, and tax work. CPAs often have a combination of business, accounting, finance, and tax knowledge that is well suited for valuing businesses.
2. Financial Consultants (non-CPA). Financial consultants have varying levels of expertise so their backgrounds should be checked carefully.
3. Business Brokers. Brokers normally stick to valuing the businesses they have listed for sale. They tend to rely on ‘quick and dirty’ methods that work well for determining asking prices, and are not intended to be formal valuations.
4. Commercial Real Estate Brokers/Agents. Commercial real estate professionals sometimes value businesses they list for sale. They are good at appraising real estate, but typically lack the skills and experience to properly value intangible assets like goodwill.

Have a nice day