Business valuation is used by accountants to figure out a value for the company’s assets and liabilities for financial reporting purposes. There are several different methods used by accountants in this process. Here are a few of the more common methods used in business valuation.
To put it simply, market-based valuation accounting uses a comparison to other recent selling prices of similar businesses. This method is rather subjective as it relies on the always changing market, even if there are not a sufficient number of similar businesses to compare to. Determining the value of a business using this method can be difficult for a sole proprietorship because they are individually owned, so finding public information on prior sales can be hard.
Asset-based business valuation accounting considers the business’s total net asset value. This is the value of all of the business’s assets minus the value of its total liabilities. There are two basic ways this is determined using this method: 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 determines the net cash that would be received if all the assets were sold and the liabilities were paid off.
Income-based business valuation accounting looks at the business’s income-producing capacity compared to its risk in order to determine the value. The main techniques used in the method are capitalization and discounting. The risk of the business 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.
The market value of New York City properties grew in 2017 for a sixth fiscal year straight. Why do you need to know that, or the value of your business? You never know when you might need to sell your business, equity financing, or add shareholders. No matter what the reason, reach out to an accountant to find how you much your business is worth so they can determine a fair price for your business through objective eyes.