Investopedia defines business valuation as the process of determining the economic value of a business or a company for the purposes of establishing partner ownership and determining sale value. It uses tools and methods that can vary between valuators, businesses, and industries. Among the common approaches to business valuation include earning-value approach, market approach, and asset valuation.
In the earning-value approach, the premise is that the true value of a business lies in its ability to produce wealth in the future. This approach includes cash flow and discounted future earnings. Cash flow is the movement of cash that represents the operating activities of a company, such as expenses and investments. Meanwhile, discounted future earnings estimate the average trend of predicted future earnings by discounting these future earnings by the capitalization rate.
Market approach is also a good determinant of a company’s worth as it evaluates the industry’s earning potential based on a theoretical demand in the market. It examines the growth and size of a company’s addressable market, including the barriers the company faces in entering the market. It also evaluates the situation of the competition and how business competitors have fared.
Asset valuation, meanwhile, is the process of determining the value of capital or fixed assets. Of all valuation approaches,
Forbes notes that this is the most concrete as it gives a real picture of the assets and liabilities of a company. Assets include possessions, such as machinery, office furniture, inventory, and prototypes, and human resources. Intellectual assets, such as patents, trademarks, and intellectual properties, also count in.
Isidor Hefter, a certified public accountant, specializes in tax planning and research for high net worth individuals. Visit this Facebook page to be informed about other related topics.
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