Business valuation is a methodology and set of principles used to examine and estimate all associated economic factors of a business by using a predetermined formula to asses the value of the business or the owner’s vested interest in the business. A business valuation will be conducted to get a snap shot idea of the current business financials and viability of the future business. It is used by buyers, sellers, and financial institutions to determine the fair market value of the business or to lend on the business.
As we say, beauty is in the eye of the beholder. Buyers and entrepreneurs want to buy or own a good and profitable business. However, in reality, some entrepreneurs or buyers want to buy a business which is well managed and has a positive cash flow with room for future expansion. Some entrepreneurs or buyers look for an opportunity where a business is in trouble or is going to be in trouble so that they can turn that business into a profitable one by using their skills and experience. No matter what, when they plan to buy a business, they want to offer a price based on the business value.
Business worth is a market value of the business given by the appraiser/broker/other valuation professional based on a combination of tangible and non-tangible assets. Value is the income generated by the particular business without considering the fixed assets. Surprisingly, in the market it is very common to see business value higher than worth and vice versa.
This is the value of a business or an asset where the buyers and sellers are exchanging in the current market, i.e. willingness or offer of the buyer, and acceptance of the by the seller.
These are a few important factors that affect the fair market value. In addition to these, there are many factors that will impact the value of a business and their influence will vary from business to business and location to location.
The asset approach method is also known as the cost approach method and is used to know the business value based on the value of the business assets. The basic idea is to ascertain the business value based on the fair market value after subtracting the liabilities, i.e. business assets minus business liabilities. All tangible assets are counted for valuation purposes. Sometimes this method may not be accurate as it is very hard to find the value of some of the tangible assets such as good will, etc.
The cost of substituting or replacing each asset is determined individually. The common asset-based methods are
This method is useful when the business assets prove more valuable than business values derived from the other methods.
The market approach method to business valuation is rooted in the economic principle of competition. This method is used to find the business value based on current market trends, market sale, going rate, or sales of comparable businesses. This type of business valuation relies on the current market sales or comparable sales in the given geographical area.
As this is valuations is based on the comparable sales, the business value depends on the supply and demand of that business in a given geographical area.
The income approach method to business valuation is rooted in the economic principle of earning or cash flow. This method of business valuation is determined by the income generation or cash flow of the given business in order to satisfy the economic benefits of the owners or the investors. The economic benefits of the owner or investors are seller discretionary earnings (SDE) or net cash (NC) flow and are capitalized and discounted to perform the valuations.
These business values are generated by the buyers and sellers based on their businesses operation experiences
There is no single parameter for why and how the buyer and seller got their values and prices; however we understand that it is usually based on supply and demand. Also all other associated factors for the sale or transfer of the ownership of the business are considered.
If have a question about business valuation, want to know more about American business valuation methods, or have further questions about valuation, please contact us at help@Bizworldusa.com or 415-234-8833 and one of our approved third party business valuation professionals will contact you.