The maneuvering behind business valuation often confuses those who do not understand the process. Company valuation depends on variables most people are not given cause to consider on a daily basis, but it remains at its core like many free market transactions. This commonality is due to the primacy of the principles of supply and demand. All complex variables aside, the value of a business is the highest amount someone is willing to give to own it. Given that, why then does the matter flummox so many? That question will be examined here in this attempt to provide a simple explanation of business valuation.
The Many Methods of Determining Value
Ask five people how to value a company and you could easily receive five different answers. While it might be nice to have choices in life, too many choices are, in this circumstance, the source of much consternation and wariness. Company valuation has no right or wrong way of proceeding. There are many methods of performing this analysis, but they all fall into three general categories.
- Asset Approach: This approach analyzes the assets of a business to determine value, subtracting from the value of those the existing liabilities. The two common methods in this approach are the asset accumulation method and the capitalized excess earnings method. The first is quite similar to a simple balance sheet, while the second adds the intangible aspect of goodwill.
- Market Approach: This approach seeks uses the historic sale prices of similar businesses in order to determine value. Sales of those businesses that have the greatest similarity to the one in question are compared to establish value through statistical analysis and direct comparison.
- Income Approach: This approach measures a company based upon the ability it possesses to produce economic gain for the owner. In order to determine value based on this approach, the evaluator must have access to data such as the company?s net cash flow.
A Final Word
Many small business owners are disappointed with the value reported to them about what they often built from nothing. There are ways to improve that amount, though, but they take time and planning. Consulting with an expert in small business valuations about your small business might cause some unwelcome confusion at times, but with the information you gain, there will be actions available. That ignorance gains you nothing, so contact a professional for a small business valuation today.