Business valuations are frequently requested by business owners, investors, potential buyers, and potential sellers to value a company ahead of a sale, merger/acquisition, or public offering. There are several different methods used by valuation experts 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 and because there may not be a significant number of similar businesses to compare to. Determining the value of a business using this method can be difficult for a sole proprietorship also because shared internal information may be challenging to verify, requiring a separate due-diligence engagement.
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.
Reasons for obtaining a valuation report include preparation for sale of business, equity financing, or addition of shareholders/co-investors. No matter what the reason, reach out to our team below if you need assistance with this type of service.