When it comes to buying or selling a business, you want to know how much it is worth.
There are three primary approaches used when valuing a business, these include a cost based approach, an income based approach and a market based approach.
1.Cost Based Approach
Under this approach, the value of the business is deemed to be the assets less the liabilities of the business, often adjusted for any direct or indirect bankruptcy costs. This approach focuses on the balance sheet and does not take into account a business’s future earnings potentially. It derives a residual value, which is the difference between the realisable value of its assets and the current value of its liabilities. This approach usually gives the lowest valuation.
2.Market Based Approach
The market based approach is suitable when valuing businesses which is a going concern. The approach works by comparing the target business to similar businesses whose stock is publicly traded, usually by assessing certain market multiples of these comparable companies. Under the multiples method, a group of comparable publicly-traded companies are selected and market multiples are developed using each company’s stock price and other financial data, which will then be applied to your business. There are four main multiples: earnings multiples (i.e price earning multiples and EBIT/EBITDA multiples), price to book multiples, enterprise value and rules of thumb.
3.Income Based Approach
The income based approach determines the market value of a business by using one or more methods that estimate the present value of future anticipated cashflows. The most common approach is the discounted cash flow model. Other models include free cash flows, a multi-period excess earnings model and a dividend discount model.
Business valuation is a very technical area and of course, there are other methods where businesses are say starting out or have intangible assets that might be exploited.
If you are thinking of buying or selling, make sure you receive the best advice before starting that journey. HW Fisher is experienced in undertaking business valuations so do get in touch with Carolyn Hazard if you would like to discuss your business.