More than an exact science, it often requires some artistic skill to place a proper evaluation of the business. The answer to what a business is worth may not simply lie in an exact analysis or calculation. However, it is important to let the numbers and the existing and projected future business marketplace conditions guide the determination of the business valuation. Minnesota businesses can benefit from the valuation services provided by professional business brokers.
Setting aside the subjective factors involved in business valuations, there are three definitive approaches to placing a valuation upon the business. These are the asset, income, and market approaches.
Asset Approach
The asset approach establishes business value as assets minus liabilities. Depending on the basis of the value utilized in the purpose of the valuation, business assets and liabilities may be valued under various methods, including liquidation value in fair market value.
Certain non-operating assets and liabilities not typically part of a business sale are often not part of the analysis.
Income Approach
The economic benefit typically in the form of cash flow or net income produced by the business governs the income approach of business valuation. This valuation amount will flow from a benefit stream that is either capitalized or discounted to a present value.
Market Approach
With the market approach, comparable business sales transaction data is reviewed to help establish a valuation for the company. The data reviewed may be in the form of averages in an industry or actual sales activity. A reasonable valuation may be determined through the use of ratios and multiplication of data pertaining to the company at hand. The method often use utilizes a multiple that is applied to cash flows, revenues, or some type of cash earnings to the business.
Conclusion
No one business is necessarily served by a specific business valuation methodology. Number of different approaches and methods are employed. Arriving at a final valuation may involve a professional analyst calculating a valuation by using multiple methods and coming up with an educated opinion of the business’s value. An experienced valuation professional can provide these services on your behalf.
