Meaning and definition of Business Valuation
Business valuation can be explained as a process and set of procedures used for estimation of economic value of an owner’s business interests. Valuation is used by the participants of financial markets for determination of prices which can be paid or received willingly to consummate a business sale. Besides determining the sale price of a business, the similar valuation tools are generally used by business appraisers for resolving disputes linked divorce litigation, estate and gift taxation, allocate business purchase price among various business assets, establish a formula for determining the value of ownership interest for buy-sell agreements, and various other business and above-board purposes.
Business valuation methods
There are many factors that decide the worth of your business, from the economy’s current state to the balance sheet. There is a variety of business valuation techniques used for determining a fair price for your business. These include:
- Asset based approaches
Generally, these business valuation techniques sum up all the business investments. Asset based business valuations can be performed on a liquidation or going concern basis.
- A going concern asset based approach records the business net balance sheet value of its assets and deducts the value of its liabilities.
- A liquidation asset-based approach estimates the net cash that would be received if all assets were sold and liabilities paid off.
- Earning value approaches
These business valuation techniques are predicted on the notion that the true value of a business lies in its ability of generating wealth in the future. The most common business valuation approach includes Capitalizing Past Earning.
Through this approach, a valuator estimates an expected level of cash flow for the company through the company’s past earnings record, regularizes them for bizarre revenue or expenses, and multiplies the expected regularized cash flows by a capitalization factor. The capitalization factor reflects what rate of return would be expected by a reasonable purchaser, in addition to being a measure of the risk that the anticipated earnings will not be achieved.
- Discounted future earnings
This is another business valuation technique which involves using an average of the trend of predicted future earnings rather than an average of past earnings and is then divided by the capitalization factor.