Business Valuation Approaches
Business Valuation Approaches, of which there are usually three, will be used for a business valuation: the asset approach, the income approach or the market approach.
The asset approach: The individual assets of the company are reviewed. Often, the adjusted book value method is used during this type of business valuation. This method does have a draw back though, as intangible assets are not measured in this approach. Should a company have a large amount of intangible assets, an appraiser may use a hybrid method, combining the asset approach with the excess earnings method, allowing any intangible assets to be included. This hybrid approach will provide a more accurate business valuation where a company has many intangible assets.
The income approach: Either the capitalization of cash flow or the discounted cash flow method may be used. The income approach does sometimes pose a problem, as the capitalization or discount rate to be used must be estimated. This rate is used to measure the risk that needs to be applied to the projected cash flow or income.
The market approach: Businesses in the same, or a similar industry are used to create valuation multiples that can be applied to a company for business valuation purposes. Private company sales, public company sales or stock prices may be used to construct the valuation multiples.
There are formulas that exist that allow businesses in particular industries to estimate their value. However, these are estimations only, and usually include a large scale of possible values, and so should be used as a guide only, and not an actual business valuation.
Regardless of the business valuation appraoch that is used, the business valuation must also comply with the new 2008-2009 USPAP Standards and Rules. Fussell Valuation Associates assure that your business valuation will be understandable, USPAP compliant, and we offer expert appraisal testimony should litigation arise. Fussell Valuation Associates has 70 years combined valuation experience with several instantces where we gave irrefutable expert testimony.
Give us a call. Phone 480 463 6579.
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