Valuing a Business

Valuing a Business

The three generally accepted approaches to value a business are:

The Asset Approach 

The Asset Approach is based on the principle of substitution, meaning, a knowledgeable buyer will pay no more for a business than the cost to replace the existing business assets. This approach considers the value of each of the tangible assets of the business separately and then totals them together to determine the total asset value of the company. This approach typically provides a floor or basement value for the business as it includes only the value of the tangible assets and does not consider the future earnings power of the business.

The Income Approach

The Income Approach utilizes a review of the company’s historical financial data and current operating trends to determine the future economic income or benefit attributable to a potential buyer. The forecasted economic benefit is then discounted back to present value as of the valuation date based on:

The Market Approach

The Market Approach is based on a comparison of the subject company to similar or comparable companies in order to determine the value of the subject company relative to the value of its peers. The subject company is compared to the comparable companies based on a number of factors including but not limited to: size, growth, leverage, profitability, turnover, liquidity, access to markets and management competence.

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