Understanding the Three Business Valuation Methods

Small business valuation appraisal

Most business owners understand the importance of having their company properly valuated. However, each year, certain business owners either don’t valuate their business or are making critical valuation mistakes. Business valuation software has helped companies create proper valuation numbers which gives businesses peace of mind and security. Learning how to value a company is a crucial element to ensuring that your business continues to prosper.

When learning how to value a company, you’ll need to take care of two main concerns, including: figuring out why you need a business valuation and preparing all required documentation for the valuation. The main documentation needed to perform any of the three business valuation methods are the balance sheet and income statements for your company. The three methods used to valuate a business use three distinct approaches: comparing recent sales of similar businesses, looking over the risk and earning power of a business, and the looking over company assets. Here is more information concerning the three ways of how to value a company.

  1. Asset Method – This method is one that requires only relatively simple calculations to determine the value of a business. Using the asset method will have you total out the estimated worth of all company assets, subtracting them from net liabilities. Once these previously mentioned calculations have been completed, you will have the valuation of your company based upon the asset method. This method is especially popular because of its general ease of calculation. However, obtaining business information that is relevant to a valuation from the balance sheet can take a bit of getting used to, especially for companies that usually use income statements for valuation purposes.
  2. Income Method – The income method has certainly become a popular small business valuation type. However, there are still plenty of large business that enjoy using the income method of valuation because of its flexibility of where a company stands. In certain situations, a market that a company is in can be under extreme conditions. Making matters worse, there might not even be a market in place for a product or service which can sometimes make the income method the most suitable valuation option. While there is much analysis that goes into determining a business valuation appraisal that uses the income method, there can still be many hypothetical calculations that can have an untrained person in charge of valuation stressed out.
  3. Market Method – The second method in this list uses income statements, the market method, is a great tool for how to value a company. Using the market approach will have you looking at recent sales of businesses that are similar to the one being valuated. Those in real estate will often use the market method when it comes time to estimate the value of a home, comparing it to similar properties that have recently sold. Businesses enjoy utilizing the market method of valuation because it is a relatively simple process that uses actual proven data of past sales figures. However, if you are in an industry where it is tough to find similar businesses, the market method might not give you enough information to accurately valuate your business.

In closing, the three methods used to valuate a business all have their own distinct advantages and disadvantages. However, choosing the valuation method that is best for your business is an important concern that you will want to take care before delving deeply into valuation. The asset method offers a straightforward calculation to determine a businesses value. However, getting information from the balance sheet of a business and translating it into a measure of value can sometimes take time to learn.

Most companies use income statements to assess their value, including the aptly named income method. The income approach is great for businesses where the market might not be able to offer them enough comparable information to create a clear business valuation. The market method uses what are known as comparables, or recently sold businesses that are similar, to determine the valuation of business. No matter which method you choose, having an accurate value of your business won’t just give you priceless information, it will help teach you what can be done to grow that value.

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