TAX BLOG

Quick Guide to Business Valuation Methods

Biz Facility

Let’s face it, the goal of many business owners is to build a company which can ultimately be sold for a

large profit. While this may be the end goal, how to go about doing this can be quite difficult.

This is why an entire industry has been created to deal with business sales and acquisitions. Unfortunately,

entrepreneurs are typically great at building businesses, but not always at selling them. Entrepreneurs tend

to have so much invested in their businesses that they are not able to emotionally detach from the

situation.

 

Hiring a business valuation consultant can help bridge this gap and often allow business owners to receive

more money for their business than they would have otherwise.

There are three primary business valuation methods which are broken down below.

 

Asset Method

When business valuation professionals use the asset method to value a business they are looking strictly at

assets to determine the value of a business. The asset method takes the actual assets of a business and uses

them to determine a fair value for a business.

The trouble with this method is that assets do not always equal value.

For instance, if your company possesses significant intellectual property, these properties may not be

considered assets. They are more abstract ideas which could be very valuable for a potential business

owner, but are not necessarily classified as assets. This is why many business owners have issues

with business valuation methods that focus only on assets and nothing else when determining the market

value for a company.

 

Market Method

The market approach to business valuation is one of the business valuation methods which attempt to use

the free market to determine the value of a business.

This method uses supply and demand principles to determine what is fair in terms of a sales price for both

the buyer and seller. To effectively complete this type of business valuation, it is important to find

comparably valued companies which can be used to help determine the value of the business in question.

This allows valuation professionals to attach a market driven price to a certain company as opposed to a

random number which has no meaning in the actual industry.

 

Income Method

The income method attempts to take into consideration the present value of the business as well as any risk

that could be considered in terms of the future earnings of the business.

This method of valuation attempts to take the expected future earnings and risk and put them in today’s

terms. To do this, the income method uses Capitalization and Discounting to attempt to fairly value a

business.

To put it simply, capitalization gives the buyer and seller a factor which can be used to determine future

earnings to add to the present value of a business. The discounting method works a bit differently in that

you attempt to project what future income will be on the front end to ultimately come up with a present

value for a company.

 

While it is true that there are several different business valuation methods, they do not have to be

confusing. If you have questions about selling your business, it is wise to enlist the services of a business

valuation professional who can give you sound advice as to how to go about selling your business. These

professionals will be able to point you in the right direction in terms of which valuation method to use to

sell your business.

 

Compiled by:

Gavin Beretta

MBA, FCIS, CMT, CiMA

Registered Financial, Business Valuation and Tax Practitioner

Practice number: PPG01087

Member of the SA Institute of Tax Practitioners

Member (Fellow) of the Chartered Secretaries Southern African

Chartered institute of Management Accountants

SAIPA Certified Independent Review Practitioner


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