Published on October 30th, 2016 | by Day Trader
Business Valuation 3 Main Approaches for Your Business
How do businesses establish their worth? Is it through their growth analysis or what exactly do they consider when evaluating their value? These are just some of the questions business people tend to ask when they want to determine their worth in the industry they are in. But the most point of focus towards analyzing business growth is by evaluating reasons behind valuation and compiling all the necessary data. Although this might sound easy, getting down to business valuation analysis requires proper planning and legislations. Until today, business valuation has proved to be a challenge to most business, this is because the term “worth” or “value” means different things to different people.
A business that focuses solely on service delivery, will perceive its worth different from a business that deals with goods and commodities. Past historical income may also be taken to mean value to some. But generally, the value of your business greatly depends on many elements, from social, economical to physical factors.
Therefore, business valuation is as important as setting goals, visions, and missions of any business, but this shouldn’t be done in-house, rather, seek business valuation services from professions who are known to deliver practical and transparent data.
But what are the reasons behind business valuation?
With so many businesses out there, rigorously competing for dominance, individual business has its own reason for valuation, below as some of the common drives. For example:
1.Business closer or sale, this can be due to health concerns, divorce, retirement or other personal reasons.
2.Financing, for the purpose of acquiring loans or debt, financiers will often want to know the value of your business.
3.Shareholders:When a business wants to add a new stakeholder or a previous shareholder wishes to buyout, the value of shares will have to be determined.
A business valuator profession will assess your business database and the relevant records using a variety of business valuation tools to establish the accurate or fair price for your business. they include:
These type of business valuation methods primarily focuses on the total investments a business has and the valuation can either be on a going basis or on a liquidation basis. Asset-based valuation is commonly applicable in corporations since all assets are owned by the company, unlike in sole proprietorship, where assets are partly owned by the business and the owner.
The core function of any running business is to make money, and this is what income approach focuses on. It majors on capitalizing past earnings of a business with the idea of future wealth creation in any business. Business valuators will look at the past financial records of a business, counter checking them with revenue and expenses. The result is then multiplied by a capitalization factor. Apart from capitalizing past earnings, evaluators can also deploy a discounted future earnings, where the predicted earnings are divided by the same capitalization factor.
3.Market Value Approaches
This approach is based on similar business in the same industry that has actually sold. It relies on signs from the real market, as experts believe that no business works in isolation. An example is when you want to sell your business, all the business valuators will do, is just to check the market and compare the previous sell-off prices.
However, most businesses prefer to use the earning value approach because of its reliability and the business valuation report produced is easy to comprehend and apply necessary actions.