subject: Some Methods For The Business Valuations [print this page] Business valuation is compulsory for many reasons, not only when you are about to buy or sell a particular business. Business valuation is usually carried out when some party is interested in buying or selling a business, at the time of business mergers, business loans, however these are not the only instances when business valuation is (or should) carried out. Being a business owner, it is a good approach to do business valuation on regular basis to get a clear picture of where do you (or your business) stands. Business valuation is not as simple as having a look at the assets or profits in income statement; doing that may provide only a fraction of the required information. Business valuation is carried out by having a look at the past, present and future of the business, industry and overall economy. It includes (but is not limited to) various types of financial analysis, market trends, competitors analysis and the evaluating the economic conditions.
Different methods are used for business valuation, and there is no method that can be regarded as the best, as each of them has got its own plus and minuses. Given below, are some of the most commonly used methods.
Asset Based valuation:
The most important factor in determining the total value of a business is its assets, no wonder, that asset based method is one of the most commonly used methods. In asset based approach, we add the net book values of the assets. This method is mostly used when a buyer is interested in buying a business. As you can see, this is the most simple and a very straightforward method, especially for privately owned small businesses. However, when you are looking to determine the value of business for a particular share holder, asset based approach is not the most suitable though.
Income based valuation:
In income based method, the value is determined by adding up all kinds of incomes (net present value) generated by a business. When someone uses income based approach for business valuation, the figure they get is usually an estimated figure, and since there is no guarantee that the business will generate that much income in the near future (in contrast with the asset based approach, where we use the actual value and not some estimated figures).
Market based valuation:
Market based valuation is actually based on the assumption that in a free market, businesses are sold and bought at the right price, which means the price at which some similar business was sold in near future, is supposed to be the right price because an overpriced business will not sell.
by: William
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