| Business valuation is the assessment of economic | | | | its assets (both tangible and intangible) minus the total |
| value (Fair market value) for that business. You may | | | | amount of its liabilities. These figures are picked from |
| need business valuation for a number of purposes, for | | | | balance sheet. In liquidity based approach, assets are |
| example when you are looking to invest in some | | | | valued by the net amount they can generate in case |
| business, or planning to buy/sell some enterprise. | | | | their owner decides to sell them in the market. |
| Business valuation is not only handy when investing into | | | | Income (or earning) Approach: |
| some business, it also helps in taking better decisions | | | | Several methods are used in Income based approach, |
| when you are getting into partnership with someone or | | | | but the most appropriate method is "discounted cash |
| seeking loans for your business. Valuation is normally | | | | flows". Unlike asset based approach where business is |
| carried by professional appraisers, first because it is a | | | | valued by the value of assets, this approach focuses |
| complex task and needs professionals to do it; second | | | | on the future earning potentials. The drawback of this |
| an outside party will provide a more objective and | | | | approach is that it depends mostly on the projected |
| neutral report. However, a better understanding of | | | | cash flows and expected returns, which are not |
| what contributes into the valuation of businesses will | | | | guaranteed to be correct. |
| help you to progress into the right direction. | | | | Market Value Approach: |
| Just like any other financial report, the appraiser or | | | | Market value based approach seeks to determine the |
| valuator needs to disclose what approach has been | | | | business value by comparing it to some recent sales |
| applied for business valuation as all approaches have | | | | of similar type of businesses. There are no real |
| different pros and cons. Three approaches mostly | | | | calculations involved and this is merely an estimated |
| used for business valuation arei) Asset based | | | | value, which relies on the simple demand and supply |
| approachii) Income based approachiii) Market approach | | | | rule for the markets. |
| Sometimes a combination of all of these approaches | | | | Most experts recommend a combination of these |
| is used. | | | | approaches for a more realistic result. There's no single |
| Asset Based Calculation: | | | | approach that will suit all types of businesses; |
| Anything of economic value, that a business own is | | | | stakeholders can choose an approach of their liking or |
| called an asset. As the name suggests, in asset based | | | | leave it to the professional valuator to decide the most |
| approach a business worth is calculated as the sum of | | | | suitable one. |