Business Valuation

Introduction

"What do you think my company is worth?" is the question we are most commonly asked by our clients and prospects who are considering the sale of their companies. Answering this question is an important step in determining whether the timing might be right to sell a particular company. Although there are many other factors that will affect whether a business owner should pursue a transaction, this article provides an overview of the most common approaches and methods used in business valuation.

The leading business valuation associations, the American Society of Appraisers (ASA), the Institute of Business Appraisers (IBA), and the National Association of Certified Valuation Analysts (NACVA), all agree on three major approaches to business valuation: the Income Approach, the Market Approach, and the Cost Approach. Under each of these approaches there are several methods that might be employed depending on the specific nature of the company being valued. A brief description of the standard approaches and most commonly used methods under each approach follows below. We conclude with the True Value Approach.

Valuation Approaches and Methods

Income Approach.
The Income Approach involves valuation methods that convert future anticipated economic benefits (e.g., cash flow) into a single present dollar amount. Depending on the valuation method used, "Income" might be represented by...
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Market Approach.
The Market Approach involves valuation methods that use transactional data to help determine a company’s value. These methods might involve private company transactions, public company transactions, as well as public company valuation...
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Cost Approach.
The Cost Approach, also known as the Asset-based Approach, involves methods of determining a company’s value by analyzing the market value of a company’s assets. This valuation approach often serves as a valuation floor since most companies ...
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Conclusion

The valuation methods discussed above represent some of the most commonly used by business valuation professionals to generate an opinion of value. Although considerable time and effort is involved in preparing formal business valuations, unfortunately the results may or may not reflect the "real world" value of a specific company if it were formally offered for sale... 
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