Commandments of Approaches to Business Valuation
What is business valuation?
In simple terms business valuation is a process of determining the net worth of one’s business. The process and approaches of business valuation contains a proper set of procedures that are used to calculate the value. The company usually, is unable to perform the valuation service itself, therefore it appoints a valuer who can value the whole business worth.
Assumptions that drive business valuation results:
Since, value of business is actually seen by the different people in different aspects, there are a number of ways in which the business valuation can be measured or calculated. The various assumptions about the same depends on the person overseeing it’s value. These are-
· For the owner of the business, the value or the worth may be defined in terms of the contribution it has made to the local community or the way it has served to the people.
· For an investor totally with financial mind, it may depend on the ability of the entity to generate or gain higher returns and profits.
Business valuation can never stand still or same at all times. This is so because the conditions of the market place changes frequently. As the fortune of the company or entity shifts, the business minded people are likely to see much greater value in the same. It is also assumed that when the jobs are scarce, the competion increases for the private businsses. This is because more and more people are said to buy the business for increasing their income. Which eventually drives the selling price of the business at higher costs.
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Why business valuation is performed?
Any owner of an organization or entity, generally tries to figure out the value of business for getting an accurate estimation about the price for which the business will be sold for. But that is just one side of the story. These days knowing the business valuation can vary upon other reason behind it and depends on who actually wants to know the worth.
Approaches to Business Valuation:
There are so many tools that are used by registered valuers to measure the accurate and correct worth of business. There are three approaches to business valuation. These approaches are-
· The Income approach
· The Asset approach
· The Market approach
Description of Approaches to Business Valuation:
This section describes the various approaches to business valuation used by a professional-
· The Income approach: It uses the basis of why business is being operated at the first place, i.e. for making profits. It uses the economic principle of expectation.
· The Asset approach: As per the asset approach one has to adapt to viewing the business as a set of assets and liabilities only. To built a clear picture on the business value the elemnts in the balance sheet are the creative blocks. This approach to Business Valuation usually is based on the economic principle of substituting.The Market approach: In this approach the valuer tries to find the signals from the real market area for properly calculating the worth of the business. Since, market is competitive area, therefore the economic principle of competion is used here.