Explaining the Three Business Valuation Methods

Business appraisal

Valuating your business is extremely important. Unfortunately, there are both small and large businesses that aren’t obtaining an accurate value of their business. Business valuation software has grown in popularity, as more business owners long for an accurate representation of their business. Here is an overview of each approach to valuate your business. No matter which approach is best for your company, it is always advisable to make use of company valuation tools to help you along the way. Business value is not an absolute value but rather one that is given by measuring both standard value and the premise of value.

  1. Asset Approach ? The asset approach is looked at by determining the value of assets that your company has. In addition, these assets must then be subtracted from the liabilities of said business. Most often, the other two valuation approaches will look at income statements while an asset approach relies heavily on information obtained from the balance sheet of a company. The calculations behind the asset approach are fairly simple but reliance on a balance sheet can feel foreign to a business that usually gets their value estimates from income statements.
  2. Income Approach ? Deciding to use the income approach to valuating your business will require many statistics regarding the cash flows of your company. The income approach to business valuation is well-known and has continued to be quite popular. One added benefit of the valuation income approach is that it is versatile and can cover a wide variety of situations a company might find themselves in. However, the sheer number of variables that need to be calculated with this method may require the help of business valuation services.
  3. Market Approach – The valuation market approach uses comparables to help determine the value of a business. Comparables are figured out by looking at assets that have recently sold and evaluating the business based on that information that was previously collected. The valuation market approach is one of the easier ones for business owners to understand. However, it is still considered a wise idea to use business valuation tools to help you when utilizing the valuation market approach.

In closing, choosing the right valuation approach can present a clearer picture of the value of your business. The asset approach makes use of placing the assets of a business against any liabilities, relying heavily on a balance sheet. The income approach will look at cash flows to help give a business a proper valuation. An income valuation of a business is usually the most often used, as it allows a greater degree of flexibility. Choosing to valuate your business through the market approach is another popular method. Looking at comparables to valuate a business, this method is the preferred one with many companies.

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