Three Standard Business Valuation Techniques

Posted on May 21, 2012 · Posted in Blog

Although there are numerous individual valuation techniques, the three most common  business valuation approaches  are summarized below:

Asset Method
The Asset Approach is based on the premise that the best possible value is to liquidate or sell the property, plant and equipment assets of a company at Fair Market Value and pay off the company’s liabilities — resulting in the net proceeds accruing to the equity of the company.

Income Method
This valuation method based on free cash flow is often considered the most relevant for private companies as it concentrates on the cash generation potential of a business. This valuation method uses the past and predicted future free cash flow of the company (meeting all the liabilities) discounted by a risk factor.  The risk factor measures the inherent and potential risks in the business. Since risks are not always easy to determine precisely, historic data if often the best  measure  of the company’s ability to generate future cash flow.

Market Value
The market value is determined by  evaluating similar sales of both private and publicly traded companies in the same or similar industries. Adjustments are made to get from public traded values to one more reflective of a privately held company. Since conditions can vary greatly among small privately held companies, this method is often used as a “Sanity Check” to help confirm the reasonableness of other methods. 

Business valuations using any method must be made by an experienced evaluator as professional judgment is always the most critical component of any business valuation.

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