Business valuation is a process and a set of procedures determining the economic value of the business or an owner’s interest in a company. Valuation is used by financial participants to determine the price of a business they are willing to pay or receive to affect a sale of a business. Business Valuation can be used to provide an accurate snapshot of the company’s financial standing.
Business Valuation Methods: A set of procedures or techniques used to calculate the value of a business is called Business Valuation Methods. The methods under each business valuation approach rely upon the same set of economic principals. The procedure and details of each business valuation method may differ considerably.
There are three procedures or methods, which you can use to calculate the business value.
1. Asset Based Business Valuation Method
2. Income Based Business Valuation Method
3. Market Based Business Valuation Method
1. Asset Based Business Valuation Method: Asset approach, also known as cost approach, is one of the three major ways to value a business. Asset based business valuation are useful for accurate purchase price allocation, an important factor of structuring a business acquisition deal.
There are two methods under the Asset approach:
I. Asset Accumulation Method
II. Excess Earnings Method
The asset accumulation method is a framework for tabulating the market values of business asset and liabilities. The difference is business value.
Excess earning method is a hybrid that combines cost and income approaches. This method is also known as “formula method”.
2. Income Based Business Valuation Method: As per the name, income based valuation method determines the business value based on its income producing capacity and risk. The main business valuation techniques used by income based method is capitalization and discounting.
Income based business valuation method mostly used in business appraisal are:
I. Capitalization of earnings
II. Multiple of discretionary earnings
III.Discounted cash flow
3. Market Based Business Valuation Method: Market based valuation method helps to calculate the subject business value by comparison to the current selling price of similar business.
Professional business appraisals include following market valuation methods:
I. Guideline publicly traded company method
II. Comparative transaction method
Both types of methods work by comparing the subject business to similar companies sold recently. Valuation formulas derived from the comparable business sales are a standard way to determine the business fair market value.
Use of multiple methods in business appraisals: Using different type of business valuation method is highly recommended to determine the accurate business value.
To calculate the exact value of a business, you can take the results of several business valuation methods into your account. This process is called business value synthesis.
Want to know more about business valuation services, contact Proxcel Advisory Services LLP, one of the leading business valuation consultants in India.