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Introduction
Excerpts from an Article By
Gary Parker
“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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