Business owners, investors, potential buyers, and potential sellers frequently request business valuations to determine a company’s value ahead of a sale, merger/acquisition, or public offering. Valuation experts use several different methods in this process. Here are a few common methods used in business valuation.
Market-Based
Market-based valuation accounting relies on a comparison to other recent selling prices of similar businesses. This method is rather subjective because it depends on the always-changing market and the availability of similar businesses for comparison. Determining a business’s value using this method can be difficult for a sole proprietorship since shared internal information may be challenging to verify, requiring a separate due-diligence engagement.
Asset-Based
Asset-based business valuation accounting considers the business’s total net asset value. This is the value of all the business’s assets minus the value of its total liabilities. There are two basic ways to determine this: going concern and liquidation. A going concern approach lists the business’s net balance sheet value of its assets and subtracts the sum of its liabilities. A liquidation approach calculates the net cash received if all assets were sold and liabilities paid off.
Income-Based
Income-based business valuation accounting examines the business’s income-producing capacity compared to its risk to determine its value. The main techniques used in this method are capitalization and discounting. The business’s risk is determined by the discount and capitalization rates. The most common methods used in income-based valuation are capitalization of earnings, multiple of discretionary earnings, and discounted cash flow.
Common reasons for obtaining a valuation report include preparation for the sale of a business, equity financing, or the addition of shareholders/co-investors. No matter the reason, reach out to our team below if you need assistance with this type of service.
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