Business valuation is crucial to determine the worth of your business. Professionals use various approaches for business evaluations. To choose the best method for your business, it is essential to seek the help of a business valuation consultant. Some of the commonly used approaches for evaluating the worth of your business are as follows:
- Market Value Valuation Method
It is the most subjective method for calculating the worth of a business establishment. This approach uses the comparison with similar companies to determine the value.
This concept is suitable for businesses with access to market information about their competitors. It is difficult for sole proprietorship businesses as the availability of comparative data of similar establishments is rare.
- Asset-Based Valuation Method
This valuation method determines your business’s worth by calculating the total net asset value without adding the liabilities.
- ROI-Based Valuation Method
This valuation approach calculates the value of your business based on your company’s profit and the type of return on investment (ROI) to be gained by a potential investor after considering your business.
- Discounted Cash Flow (DCF) Valuation Method
The discounted cash flow valuation approach is also known as the income method. It calculates the worth of a business based on its potential cash flow after adjusting its current value. It is suitable for businesses with inconsistent profits. This method is detail-oriented and must be done with utmost care to achieve accurate outcomes.
- Capitalization of Earnings Valuation Method
This approach calculates the potential of a business based on its cash flow, annual investment return, and expected worth.
It is suitable for businesses with consistent profit. It follows that a business’s ability to produce profit depends on its current worth.
- Multiples of Earnings Valuation Method
This method is similar to the capitalization of earnings valuation approach. It also calculates the worth of a business based on its ability to generate profit in the future. It is also referred to as the time revenue method. The method is generally preferred for small businesses. It decides a business’s highest potential by assigning a multiplier to its present revenue.
- Book Value Valuation Method
The book value method generates the worth of your business at a given point in time by assessing the company’s balance sheet.
The value of the company’s equity (difference of asset and liability) is calculated by the balance sheet, which is the worth of your company. This is suitable for those businesses that generate less profit but hold significant assets.