What Are the Methods for Doing a Business Valuation?

Man reviewing business valuation: Doing a Business Valuation: Key Steps & Considerations

How much is your business worth? The answer to this question doesn’t just matter when you’re ready to sell your company. Business valuation can help you determine how much your business is worth, which can help you, your investors, and other stakeholders evaluate your company and its financial direction.

There’s more than one strategy for evaluating your business. The following are some of the top methods for developing a business valuation. Business owners should use one or more of these methods to assess their company:

Cost Approach (or Asset Approach)

The cost approach (also called the “asset approach”) assesses the fair market value (FMV) of your company’s net assets. The resulting number can be referred to as the company’s “book value,” though it can also be called the “control level” value, referring to the owner’s ability to sell the whole operation or liquidate company assets.

The cost approach is simple and can be great for the kinds of calculations you might do during tax season. On the other hand, your “book value” functions more like a snapshot, reflecting the value of your business at a given moment in time, and doesn’t account for your company’s ability to generate revenue in the future.

Market Approach

You can also derive the “market value” by comparing your business to other companies of the same size, in the same industry, and from the same geographic area. Developing this figure can take some research since you’ll want to compare your business to companies with similar assets and in similar regions.

This method assigns a value based on market realities and relies on data that is tangible and public. It can be an effective method to use when evaluating your business for investors or financiers.

Income Approach

The income approach evaluates the future value of your business. This approach is a bit more complex since the financial projections are rooted in data such as revenues, expenses, and tax liabilities. It tends to be excellent for established, profitable businesses since future calculations will be rooted in past performance.

When employing the income approach, the most basic version is the “capitalization of earnings” method. It crafts an estimate by assuming that your current financial performance will remain constant.

In other words, this method assumes that your profits will stay the same year by year and thereby projects how much they will be over time.

Discounted Cash Flow

Technically, the discounted cash flow (DCF) method is another form of the income approach (see above). But what makes the DCF method unique is that it calculates cash flow over a set period — usually three to five years.

This method then uses a “discount rate” to compare these values to your present value. The idea is simple: will your business be profitable in the future? This insight lets investors know that your company is worth investing in.

Get a Free Valuation

Sunbelt Business Brokers primarily uses the market approach when evaluating your business. We offer custom deal structures, dedicated financial advisors, and other innovative strategies to ensure you get the best price for your business.

For more information, contact Sunbelt Business Brokers of Naples for a free valuation and consultation.