Business valuation is the process wherein the economic value of a business or company is determined. Potential buyers and sellers use the information before proposing deals, mergers and acquisitions, among other things. There are three approaches (or methods) to business valuation.
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Asset approach
The asset approach determines the value of a company or business based on how much money is needed to set up the same company or business. There are a couple of sub-methods under the asset approach. They are the asset accumulation and excess earnings methods. Asset accumulation helps compute the value of a company’s assets and liabilities. Excess earnings method calculates for values of things like business goodwill.
Income approach
This is a bit self-explanatory. The economic values of businesses are based on income – specifically on its capacity and risk to generate revenue. The sub-methods under the income approach utilize capitalization and discounting as a means to establish risk.
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Market approach
The market approach compares the prices of similar businesses that were recently sold. This approach is better for private companies, but may be inaccurate when it comes to public companies. Although the methods used here are a standard way to look at fair market value.
The professionals of Generational Equity conduct a full evaluation of a business before taking their client to market. Learn more about the company’s evaluation service here.
In the equity market this leads to statements such as "the valuation of a stock is low" if the current market pricing of the stock is historically low compared to, for example, the estimate of the near term future earnings. The other model is based on that a company has a fundamental intrinsic value that is separate from the market pricing of its equity.
ReplyDeletedetermine the value of a company
My parents would like to sell our souvenir shop. This might help them for business valuation.
ReplyDeleteBusinessmen should know these methods. Really helpful..
ReplyDeleteI only knew about asset approach. I just learned that there are other methods for business valuation.
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