Basic Valuation Methods
Asset Based valuation methods total up all the assets in the business. Asset-based business valuations can be done on a going concern or on a liquidation basis.
A going concern asset-based approach lists the business’s net balance sheet value of its assets and subtracts the value of its liabilities.
A liquidation asset-based approach determines the value that would be received if all assets were sold and liabilities paid off.
Earnings Valuation methods are based on the idea that a business’s true value lies in its ability to produce wealth in the earning stream. The most common earning value approach is Capitalizing Past Earnings.
A valuator determines an expected earnings for the company using a company’s record of past earnings, normalizes them for unusual revenue or expenses, and multiplies the expected normalized earnings by a capitalization factor.
The capitalization factor is a reflection of the rate of return a reasonable purchaser would expect on the investment, as well as a measure of the risk that the expected earnings will not be achieved.
Discounted Future Earnings is another earning value approach to business valuation where instead of an average of past earnings, an average of the trend of predicted future earnings is used and divided by the capitalization factor.
Market value approaches to business valuation attempt to establish the value of your business by comparing your business to similar businesses that have recently sold. Obviously, this method is only going to work well if there are a sufficient number of similar businesses to compare. When the Market Approach is utilized it is important to adjust Market multiples for differences between the subject company and Market data for size, location, product, customers, longevity etc.